Multiple Choice
On which of the following financial statements is depreciation expense reported as a decrease in net income in a single-step income statement?
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4. Merchandising Operations
Single-step Income Statement
Multiple Choice
On a common-sized single-step income statement, how is the current year's operating expense typically presented?
A
As a percentage of gross profit
B
As a percentage of net income
C
As a percentage of total assets
D
As a percentage of total revenues
Verified step by step guidance1
Understand the concept of a common-sized single-step income statement: This type of income statement expresses each line item as a percentage of a common base, typically total revenues. This allows for easier comparison across periods or companies.
Identify the base for operating expenses: In a common-sized single-step income statement, operating expenses are presented as a percentage of total revenues, not gross profit, net income, or total assets.
Clarify why total revenues are used: Total revenues serve as the denominator because they represent the overall inflow of economic benefits during the period, making it a logical base for expressing operating expenses as a proportion of the company's activity.
Relate operating expenses to total revenues: To calculate the percentage, divide the operating expenses by total revenues and multiply by 100. This shows the proportion of revenues consumed by operating expenses.
Apply this understanding to the problem: The correct presentation of operating expenses on a common-sized single-step income statement is 'as a percentage of total revenues,' aligning with the standard practice in financial accounting.
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