6.6 Describe and Prepare Multi-Step and Simple Income Statements for Merchandising Companies

Income Statement Formats

Merchandising businesses can prepare income statements in two formats:

1. Multi-Step Income Statement (More detailed)
2. Simple Income Statement (Single-step, less detailed)

Multi-Step Income Statement

Format: Shows multiple subtotals and calculations

Structure:

Sales Revenue
- Sales Returns
- Sales Allowances
- Sales Discounts
= Net Sales

- Cost of Goods Sold
= Gross Profit

- Operating Expenses
= Operating Income

+ Other Revenue
- Other Expenses
= Net Income Before Tax

- Income Tax
= Net Income

Example: Multi-Step Income Statement

Mode Luxembourg SARL - Retail Clothing Store

Mode Luxembourg SARL
Income Statement
For the Year Ended December 31, 2024

SALES
  Sales Revenue (700000)                    €150,000
  Less: Sales Returns (702000)                (2,000)
  Less: Sales Allowances (703000)              (500)
  Less: Sales Discounts (703000)             (1,000)
Net Sales                                    €146,500

COST OF GOODS SOLD
  Cost of Goods Sold (602000)                (80,000)
Gross Profit                                  €66,500

OPERATING EXPENSES
  Salaries Expense (620000)                  €25,000
  Rent Expense (612000)                       8,000
  Utilities Expense (615000)                  2,500
  Insurance Expense (613000)                  1,200
  Depreciation Expense (640000)               3,000
  Delivery Expense (618000)                   1,500
  Other Operating Expenses (619000)           2,800
Total Operating Expenses                     (45,000)

OPERATING INCOME                               €21,500

OTHER REVENUE
  Interest Income (730000)                      500
Total Other Revenue                             500

OTHER EXPENSES
  Interest Expense (660000)                    (800)
Total Other Expenses                           (800)

NET INCOME BEFORE TAX                          €21,200

INCOME TAX EXPENSE (680000)                    (3,000)

NET INCOME                                     €18,200

Key Calculations:

• Net Sales: €150,000 - €2,000 - €500 - €1,000 = €146,500
• Gross Profit: €146,500 - €80,000 = €66,500
• Gross Profit Margin: (€66,500 ÷ €146,500) × 100 = 45.4%
• Operating Income: €66,500 - €45,000 = €21,500
• Net Income: €21,200 - €3,000 = €18,200

Simple Income Statement

Format: Single-step, all revenues together, all expenses together

Structure:

Total Revenues
- Total Expenses
= Net Income

Example: Simple Income Statement

Mode Luxembourg SARL
Income Statement
For the Year Ended December 31, 2024

REVENUES
  Net Sales (700000)                         €146,500
  Interest Income (730000)                      500
Total Revenues                                €147,000

EXPENSES
  Cost of Goods Sold (602000)                 €80,000
  Salaries Expense (620000)                   25,000
  Rent Expense (612000)                        8,000
  Utilities Expense (615000)                   2,500
  Insurance Expense (613000)                   1,200
  Depreciation Expense (640000)                3,000
  Delivery Expense (618000)                    1,500
  Interest Expense (660000)                      800
  Other Operating Expenses (619000)            2,800
  Income Tax Expense (680000)                  3,000
Total Expenses                               (128,800)

NET INCOME                                     €18,200

Comparison

Multi-Step Advantages:

• Shows gross profit (important for merchandising)
• Separates operating from other activities
• More detailed analysis possible
• Better for management decisions
• Preferred format for most businesses

Simple Advantages:

• Simpler to prepare
• Easier to understand
• Less detailed
• Suitable for very small businesses

Luxembourg Recommendation: Use multi-step format for better analysis and decision-making.

Luxembourg Format Requirements

PCN Requirements:

• Must follow PCN account classifications
• Must include proper account numbers
• Can use either format (multi-step preferred)
• Must be in French, German, or English
• Must be filed with RCS

For RCS Filing:

• Multi-step format is standard
• Must show gross profit
• Must include all required accounts
• Must follow PCN presentation

Gross Profit Analysis

Gross Profit Margin is a key metric for merchandising businesses:

Formula: Gross Profit Margin % = (Gross Profit ÷ Net Sales) × 100

Interpretation:

• High margin (>40%): Good pricing, low costs, or premium products
• Medium margin (20-40%): Typical for many retail businesses
• Low margin (<20%): High competition, low pricing, or high costs

Industry Benchmarks (Luxembourg):

• Clothing retail: 40-60%
• Grocery stores: 20-30%
• Electronics: 15-25%
• Restaurants: 30-50% (food cost)

Luxembourg Compliance Note

Income statements for Luxembourg businesses must:

• Follow PCN format
• Include proper account classifications
• Show gross profit (multi-step preferred)
• Be accurate and complete
• Be filed with RCS as part of annual accounts
• Support tax return preparation

Think It Through

Why is gross profit an important measure for merchandising businesses? How does it differ from net income, and why is it useful for business analysis?

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