Question

"There are different sections that make up a classified income statement. The first section is operating revenue, this is the revenue that is earned from normal business activities. The next section is the cost of goods sold, where the information pertaining to the cost of merchandise sold during that period; three entries are needed for this section: beginning inventory, net delivered cost of purchases, and ending inventory. The next section is gross profit, which is the difference in net sales and cost of goods sold. Operating expenses are the expenses that are accumulated during normal business activities. Net income and net loss from operations is separated for easier readability. Other expenses and incomes are entered into different sections along with net income and net losses. Sometimes a condensed income statement is provided with summarized information in fewer lines of information." Is this information substantially different from the income statement that you would normally consider? Why do we call it classified?

Answer 1

A classified income statement is a financial report showing revenues, expenses, and profits, for which there are subtotals of the various revenue and expense classifications. The classified format is used for more complex income statements, to make them easier for users to read.

A classified income statement typically contains three blocks, which are as follows:

1.Gross margin section. Subtracts the cost of goods sold from revenue, to arrive at the gross margin. This information is useful for ascertaining the amount of profit generated strictly from the sale of goods and services. The line items usually included in this section are:

• Gross revenue

• Less: Sales discounts and allowances

• Cost of direct materials

• Cost of direct labor

• Cost of factory overhead

2.Operating expenses section. Summarizes the cost of all operating expense line items into a subtotal, followed by a profit or loss from operations line item. This information is useful for determining the ability of a business to generate a profit from its core operating activities. The line items usually included in this section are:

• Accounting and legal expense

• Commissions expense

• Compensation and benefits expense

• Insurance expense

• Rent expense

• Supplies expense

• Utilities expense

3.Non-operating expenses section. Summarizes all expenses not related to operations. This information adjusts operating income by any additional factors to arrive at net profit or loss for the entire entity. The line items usually included in this section are:

• Gain/loss on sale of assets

• Interest income/expense

• Taxes

A classified income statement organizes information better than a single-step income statement, where revenue and expense line items are simply listed in sequence, with no attempt to present sub-totals.

Similar Terms

A classified income statement is also known as a multi-step income statement.