Data from the income statement can be grouped into two formats: the single-step and the multi-step or multiple step income statement. A single-step income statement groups all revenues together (sales revenues plus interest revenue and other revenue) and all expenses together (including cost of goods sold expense.  An example of a single-step income statement would look like this:

A multi-step (or multiple-step) income statement usually contains one or more subtotals that highlight significant relationships among certain accounts. The multi-step income statement begins with "sales revenue" and then immediately subtracts "cost of goods sold expense" in arriving at "gross margin" (or "gross profit"). A multi-step income statement also segregates interest income and interest expense away from the net income of the regular operations of a firm. An example of a multi-step income statement would look like this:

Ideally, a manufacturing or a retail company should present a multi-step income statement to its outside investors and creditors. The external users of those income statement, then, could know immediately what the gross margin percentage is from each dollar of good sold. This is important investor/creditor information, because usually the gross margin percentage (gross margin divided by sales) remains relatively close among firms in the same industry.

1. Toys-R-Us is a retail concern. It sells items that it previously purchased from suppliers. Visit the Toys-R-Us annual report and its income statement.

   Does Toys-R-Us present a multi-step or single-step income statement?

2. Sears is also a retail concern (though it does have other operations, such as issuing credit cards and charging interest from its borrowers). Use the annual report and its income statement..

   Does Sears present a multi-step or single-step income statement?

3. Could an investor figure out what gross margin is from the Sears annual report? If so, what is it?

4. Delta Airlines is a service company. They do not sell any type of tangible good. Rather they sell a service¾they fly people from one city to another. Visit Delta Airlines online. Click on "97 Annual Report" followed by "consolidated statements of operations."

   Does Delta have a single-step or multi-step income statement?

5. Within the expenses for Delta Airlines, can you find a "cost of sales" or "cost of goods sold"?

6. What are the two largest expense items for Delta Airlines? Is this usually true for all service organizations?

7. Get the Disney annual report. Ideally, companies that sell tangible goods (either retail or manufacturing companies) should present a multi-step income statement. Companies that sell a service (and have no cost of sales or cost of goods sold) should present a single-step income statement.

   What do you think Disney should present?

8. Does Disney have a single-step or a multi-step income statement?

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PHLIP was originally conceived and developed for Prentice Hall with the expertise of Dan W. Cooper of Active Learning Technologies, Inc.and Scott R. Lyman.
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