Question
Aldermoor Trading uses a perpetual inventory system. The following adjusted balances relate to the year ended December 31, 2025. The tax rate is 25%.
| Account | Amount |
|---|
| Sales Revenue | $600,000 |
| Sales Returns and Allowances | 16,000 |
| Sales Discounts | 4,000 |
| Cost of Goods Sold | 348,000 |
| Salaries and Wages Expense | 112,000 |
| Rent Expense | 30,000 |
| Advertising Expense | 20,000 |
| Depreciation Expense | 16,000 |
| Insurance Expense | 6,000 |
| Interest Expense | 8,000 |
Required: Prepare a multi-step income statement for the year ended December 31, 2025.
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