Multiple Choice
On a common-sized single-step income statement, how is the current year's operating expense typically presented?
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4. Merchandising Operations
Single-step Income Statement
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Which financial statement is primarily analyzed using the percentage of sales method?
A
Balance Sheet
B
Statement of Retained Earnings
C
Income Statement
D
Statement of Cash Flows
Verified step by step guidance1
Understand the percentage of sales method: This method is used to estimate financial figures based on a percentage of sales. It is commonly applied to items like expenses, revenues, and other income statement components.
Identify the financial statement that primarily deals with sales and related figures: The Income Statement is the financial statement that reports revenues, expenses, and net income, all of which are directly tied to sales.
Recognize why other financial statements are not primarily analyzed using this method: The Balance Sheet focuses on assets, liabilities, and equity, which are not directly tied to sales percentages. The Statement of Retained Earnings deals with changes in retained earnings, and the Statement of Cash Flows focuses on cash inflows and outflows, neither of which are primarily analyzed using sales percentages.
Conclude that the Income Statement is the correct answer: Since the percentage of sales method is used to analyze items like revenues and expenses, which are reported on the Income Statement, this is the financial statement primarily analyzed using this method.
Apply this understanding to similar problems: Whenever a method involves analyzing revenues or expenses as a percentage of sales, it is likely tied to the Income Statement.
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