Institute of Business Administration Karachi

Principles of Accounting
Spring 2021
Assignment 2

1. You are an accountant for a small retail store and are tasked with determining the best
presentation for your income statement. You may choose to present it in a multi-step format or
a simple income statement format. The information on the statement will be used by investors,
lenders, and management to make financial decisions related to your company. It is important
to the store owners that you give enough information to assist management with decision-
making, but not too much information that may possibly deter investors or lenders. Which
statement format do you choose? Why did you choose this format? What are the benefits and
challenges of your statement choice for each stakeholder group?

2. Solve problem P4-5A in Weygandt, Kimmel and Kieso, 12 th edition.

Note: You are required to submit the assignment in your handwriting. You may submit a hard
copy of the assignment or upload it on LMS in PDF format on or before the due date.

I would first consider the parties that will be using my income statement i.e., investors, lenders
and management. If I were to use the simple income statement format then it is obvious that I
won’t be able to gain the same amount of trust from the parties involved than from a multi-step
income statement format. To put it more clearly, a multi-step income statement would go into
much more detail and that is the only way I could gain the parties’ trusts. I need them to trust
me and invest in my business so, I need to provide as much information as possible and avoid
information overload. I will need to create a balance between the management and the
investors and lenders because I need to provide management with enough information and it
shouldn’t be an overload of information for the investors or lenders.
I would definitely choose the multi-step format; both of the formats have their pros and cons
but I will be better off if I choose the multi-step format because the simple income statement
format would be too straightforward. The external parties should be given extra information so
that they would get a better insight of our revenues and expenses. That is why I would choose
multi-step income statement over a simple one.
The benefits of choosing the multi-step income statement format for the management will be
that they will get an extra bit of information regarding our revenues and expenses. Therefore,
they will be able to do a better job in making financial decisions for our company. Similarly, the
benefits of choosing this format for the investors and lenders are, as mentioned above, that it
gives them a better idea of our revenues and expenses. However, the challenge that I will be
facing here is that it will be really difficult to provide the information in a balanced amount. I
 would not want to disclose something that would make the investors and the lenders lose trust
in me. Moreover, I will need to give as much information as possible to the management so this
will be a dilemma that I will be facing. Nevertheless, the situation would be way worse in the
case of a simple income statement format so, the challenges mentioned above aren’t that
critical and can be dealt with by exercising caution and care.

1.Purpose of an income statement is multifold. It conveys various business activities and profitability to
stakeholders. Income statement offers details about the top and bottom line as well as various types of
costs incurred. The periodic details of income statement gives valuable insight about the progress the
company has made with respect to revenues and profits. The horizontal and vertical analysis of income
statement also throw out useful insights.

2.I would go ahead with the multi step format. Multistep format classifies revenues and expenses into
operation and non-operating heads and offers better insight about the core operation of the business.

3.Single format income statement is easy to prepare and simple to understand. However, if one is trying
to raise capital from investors, multi-step format provides better insights and helps stakeholders like
investors, lenders to understand the business operation much better. A single format statement would
not be preferred by potential shareholders for these reasons.

4.In case of investors and lenders, multistep statement offers useful insight and better understanding for
investment decision making and lending decisions. The gross margin figure can be easily tracked and
compared with past figures.However, because of its detailed nature, the statement also offers additional
information that can be counter productive and attracts more scrutiny.
For management, multi-step statements are helpful as well as the categorization of revenue and
expenses allow them to understand improvement areas. The categorization gives clarity over revenue
generated from primary activities and its associated costs incurred. Ultimately, it helps in informed
decision making for the management.