CHAPTER 4

a) What type of income statement format does P&G use? Indicate why this format might be used to present income statement information.

The type of income statement format that P&G uses is the single-step income statement format. This format is often used by companies to report revenues, gains, expenses, and losses. In this particular format, expenses are deducted from revenues in order to arrive at a net income or a net loss which is where the term “single-step” came from. The companies that do use the single-step income statement use it because of its simplicity. The main advantage of using the single-step income statement is that the format is presented in a very simple way and the fact that it is not important what type of revenue or expense has main priority. The single-step format eliminates any potential classification problems as well.

b) What are P&G’s primary revenue sources?

P&G’s primary revenue sources include beauty and health because at the end of 2006 their ending revenue was $17,870, and in 2007their ending revenue was $18,302. Beauty and health had net sales of $31.9 billion. Another source of primary revenue is Gillette GBU, with and ending revenue of $21,539 and an ending revenue of $22,031 in 2007. Gillette had net sales by GBU of $9.3 billion, and a third revenue source is household care with net sales of $36.2 billion.

c) Compute P&G’s gross profit for each of the years 2005-2007. Explain why gross profit increased in 2007.

2005-$56,741 - $27,872 = $28,869
2006- $68,222 - $33,125 = $35,097
2007- $76,476 - $36,686 = $39,790
*Amounts in millions
Gross profit actually increased from 2005 to 2006, and then again in 2007. The reason why gross profit increased is because the net sales increased a significant amount through the three years, and cost of goods sold increased in