2. Income statement presentation Alternative formats 1.Classification by nature of expense Classification on the basis of inputs – what the money was spent on (e. g., salaries, amortization) 2.Classification by function Output-based classification – what money was used for (cost of goods sold, operating expenses, selling and administrative expenses)

Example: Nature vs. Function Chen Inc. ExpenseDepreciationSalariesOtherTotal Cost of goods sold$500 Selling$120$100$40260 Administrative Total$180$210$70$960 Revenue for the year was $1,400. Prepare an income statement for Chen for the year, classifying expenses by (a) nature and (b) function.

(a) Chen Inc. Income statement: Expenses classified by nature Chen Inc., Income Statement for the year ended December 31 Revenue Cost of Goods Sold Depreciation expense Salaries expense Other expenses Net income $1, $440

(b) Chen Inc. Income statement: Expenses classified by function Chen Inc., Income Statement for the year ended December 31 Revenue Cost of Goods Sold Selling expense Administrative expense Net income $1, $440