In larger companies, operating expenses are often subdivided into selling expenses and administrative expenses, as illustrated in the income statement in Illustration 5-23. Selling expenses are those associated with making sales. They include sales promotional expenses as well as expenses of completing the sale, such as delivery and shipping expenses. Administrative expenses (sometimes called general expenses) relate to general operating activities such as personnel management, accounting, and store security.
When sub groupings are made, some expenses may have to be pro-rated, e.g., 70% to selling and 30% to administrative expenses. For example, if a store building is used for both selling and general functions, building expenses such as depreciation, utilities, and property taxes will need to be allocated.
Any reasonable classification of expenses that serves to inform those who use the statement is satisfactory. For example, the present tendency in statements prepared for management is to present in considerable detail expense data grouped along lines of Read More »
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Sub grouping of Operating Expenses
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Two forms of the income
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Two forms of the income statement are widely used by merchandising companies. These income statements are explained below.
The multiple-step income statement is so named because it shows the numerous steps in determining net income (or net loss). The Highpoint Electronic income statement in Illustration 5-13 is an example. It shows two steps: (1) cost of goods sold was subtracted from net sales, and (2) operating expenses were deducted from gross profit. These steps pertain to the company’s principal operating activities. A multiple-step statement provides users with more information about a company’s income performance by distinguishing between operating and non- operating activities. The statement also highlights intermediate components of income and shows sub groupings of expenses. Read More »
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