Question
Kaberi Textile Ltd. uses a periodic inventory system. Its adjusted trial balance at December 31, 2025 includes the following accounts.
| Account | Amount |
|---|
| Sales | $660,000 |
| Salaries Expense (Selling) | $29,000 |
| Sales Discounts | 5,000 |
| Salaries Expense (Administrative) | 63,000 |
| Sales Returns and Allowances | 2,000 |
| Depreciation Expense (Administrative) | 17,000 |
| Merchandise Inventory, January 1 | 120,000 |
| Utilities Expense (Administrative) | 22,000 |
| Purchases | 230,000 |
| Insurance Expense (Administrative) | 44,000 |
| Freight-In | 10,000 |
| Rent Expense (Administrative) | 24,000 |
| Purchase Discounts | 2,400 |
| Loss on Sale of Land | 2,000 |
| Purchase Returns and Allowances | 3,600 |
| Interest Expense | 7,000 |
| Merchandise Inventory, December 31 | 71,000 |
| Income Tax Expense | 10,000 |
| Advertising Expense (Selling) | 70,000 |
| Freight-Out (Selling) | 4,000 |
| Depreciation Expense (Selling) | 28,000 |
| Utilities Expense (Selling) | 11,000 |
Additional information:
- Kaberi Textile Ltd. uses the periodic inventory system, so Cost of Goods Sold must be built up from the purchases and inventory accounts above rather than taken from a single ledger balance.
- Classify each operating expense as Selling or Administrative per the label above, and report separate subtotals for each group before Total Operating Expenses.
- Report Loss on Sale of Land and Interest Expense in an Other Income and Expense section, below Income from Operations.
Required: Prepare a multi-step income statement for Kaberi Textile Ltd. for the year ended December 31, 2025, using the periodic inventory system.
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