Multiple Choice
Which of the following is also known as a profit and loss statement?
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4. Merchandising Operations
Single-step Income Statement
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Which of the following equations correctly describes how to calculate net income on a single-step income statement?
A
Net Income = Gross Profit - Operating Expenses
B
Net Income = Total Revenues - Total Expenses
C
Net Income = Operating Income - Income Tax Expense
D
Net Income = Total Revenues + Total Expenses
Verified step by step guidance1
Understand the concept of a single-step income statement: A single-step income statement simplifies the calculation of net income by subtracting total expenses from total revenues, without categorizing expenses into operating and non-operating sections.
Review the formula for net income: Net Income = Total Revenues - Total Expenses. This formula directly aligns with the single-step income statement approach.
Analyze the incorrect options: For example, 'Net Income = Gross Profit - Operating Expenses' is incorrect because gross profit is not used in a single-step income statement. Similarly, 'Net Income = Operating Income - Income Tax Expense' is incorrect because operating income is not a component of the single-step format.
Evaluate the option 'Net Income = Total Revenues + Total Expenses': This is incorrect because adding revenues and expenses does not yield net income; instead, expenses must be subtracted from revenues.
Conclude that the correct formula for calculating net income on a single-step income statement is: Net Income = Total Revenues - Total Expenses.
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