Question
Redwood Athletics is a retailer that uses a perpetual inventory system (so cost of goods sold is already accumulated in one account). The following balances were taken from its adjusted trial balance for the year ended December 31, 2026. The income tax rate is 30%.
| Account | Amount |
|---|
| Sales Revenue | $520,000 |
| Sales Returns and Allowances | 12,000 |
| Sales Discounts | 8,000 |
| Cost of Goods Sold | 300,000 |
| Salaries and Wages Expense | 100,000 |
| Advertising Expense | 18,000 |
| Depreciation Expense | 12,000 |
| Rent Expense | 24,000 |
| Insurance Expense | 6,000 |
| Interest Expense | 5,000 |
Required: Prepare a multi-step income statement for the year ended December 31, 2026, showing net sales, gross profit, total operating expenses, operating income, and income tax expense.
Scoring
- 40% Account naming / line matching
- 40% Amount correctness
- 20% Structure / section placement
IAS 1 — Presentation of Financial Statements
A multi-step statement earns its name from the subtotals: net sales less cost of sales gives gross profit, less operating expenses gives operating profit, and only then do non-operating items, finance costs and tax appear. Decide for every line whether it belongs above or below the operating-profit line before you place it.
Common mistakes
- Burying interest expense or investment income inside operating expenses — they sit below operating profit.
- Netting sales returns and discounts against nothing, or omitting them so revenue is reported gross rather than net.
- Presenting income tax expense as an operating expense instead of a separate deduction after pre-tax profit.
Further readingIncome statement vs balance sheet