Blog

Understanding the Multi-Step Income Statement in Financial Accounting: Overview and Examples

Starting off, the gross profit is equal to the revenue generated by a company in a pre-defined period minus its cost of goods sold (COGS), which are the direct costs incurred as part of its core business operations. Both selling and administrative expenses are added together for computing total operating expenses. And the Company’s Operating income is calculated by deducting these total operating expenses from the gross profit in the first section. This would include cost of goods sold, as well as costs such as advertising expenses, salaries and administrative expenses, including office supplies and rent.

Add Non-Operating Revenues and Expenses

In this article, we explain in details the definition of the multi-step income statement with examples, and also explain the type of business that uses the multi-step approach. Revenues including other income are shown together at the top of the income statement and totalled. Below the total revenue line all expenses including other expenses are totalled and, in a single step, are deducted from the total revenue to give net income.

A downside of single-step statements is that some investors may find them to be too thin on information. The absence of gross margin and operating margin data can make it difficult to determine the source of most expenses and can make it harder to project whether a company will sustain profitability. Without this data, investors may be less likely to invest in a company, and this can cause businesses to miss out on opportunities to acquire operating capital. This is the amount of money the company made from selling its products after all operating expenses have been paid.

• Here is one example of a multi-step income statement format for XYZ Company for the year 2020.
• At the top section of this income statement, to compute the gross margin, subtract the cost of good from the net sales.
• The operating section contains information about revenues and expenses of the principle business activities.

Cash Flow Statement

• Investors and creditors can evaluate how well a company performs its main functions separate from any other activities the business is involved in.
• It states the name of your company, it identifies the document as an income statement and it defines the reporting period covered by the document.
• Preparing the multi-step income statement is beneficial for medium to big corporations to keep track of their income.

She is a former CFO for fast-growing tech companies with Deloitte audit experience. When she’s not writing, Barbara likes to research public companies and play Pickleball, Texas Hold ‘em poker, bridge, and Mah Jongg. For public companies, there are strict reporting guidelines established where a single-step format is not even an option. Each company will have to pay income tax to the government depending on the tier’s of income that they fall into. In any business, customers can return the goods as the product might be broken, faulty, or may malfunction.

A multi-step statement is an income statement prepared to report a company’s sales and revenue, expenses and overall profit or loss for any given period. It is a detailed report unlike the single-step income statement and utilizes multiple accounting equations to calculate multiple-step income statements: net profit for a business. Gross profit, a fundamental component of the multi-step income statement, is calculated by subtracting the cost of goods sold from the total revenue. This figure represents the profit earned from the core business activities, excluding operating expenses.

The gain does not relate to the company’s core business activities, so it is listed in the non-operating section of the income statement. A multi step income statement is a company’s financial statement in a format presenting revenues, costs, and expenses for a specific reporting period. It provides a more detailed breakdown of expenses than a single-step income statement and uses a variety of equations to determine the net income of a business. It begins with the gross profit calculation, derived by deducting the cost of goods sold from the total revenue. Subsequently, operating expenses are deducted from the gross profit to calculate the operating income, representing the profit generated from the core business operations.

Single Step Statement Example

Moving forward, you should be able to compute the company’s Net Income before tax by adding the sum of operating income with non-operating income. To compute the operating income, you can follow the accounting equation stated above. Double Entry Bookkeeping is here to provide you with free online information to help you learn and understand bookkeeping and introductory accounting. So, we get various details of the advantage of a multi-step income statement from the above points. At Taxfyle, we connect individuals and small businesses with licensed, experienced CPAs or EAs in the US.

Time Value of Money

Multi-step income statements, on the other hand, use multiple equations to calculate net income. In doing so, they also calculate gross profit and operating income, which aren’t included on a single-step income statement. In comparison, a single-step income statement gives a simple record of financial activity. A multi step income statement is more detailed than a simple single step income statement. It provides insights that financial statement users need when reading a profit and loss statement prepared using GAAP accounting standards. Multi-step income statement format is any day better than a single-step statement as it provides proper detailing.

Thus, while making any decision, it is essential to look at the benefits, limitations, and other documents, statements, and reports that will help determine the entity’s financial stability. The Operating head is further divided into two important headings, which list primary business incomes and the expenditures. It is usually known as a Trading Account, where Direct Incomes and Expenses are mentioned. Shaun Conrad is a Certified Public Accountant and CPA exam expert with a passion for teaching. After almost a decade of experience in public accounting, he created MyAccountingCourse.com to help people learn accounting & finance, pass the CPA exam, and start their career.

It’s available as a 10-K company filing in the SEC’s EDGAR database dated February 23, 2022. The Board of Directors will receive a financial statement package, including the (multi-step) income statement, that includes analysis and interpretations of trends by the financial analyst team and the company’s CFO. Each of the three profit metrics—gross profit, operating income, and net income—are highlighted on the income statement of Apple (AAPL). Yet, from a practical perspective, the insights that can be obtained from the multi-step income statement are ultimately far more insightful to understand and analyze the financial performance of a company. Therefore, the net income factors in non-operating items such as interest expense, other non-operating costs such as non-recurring losses from inventory write-downs, and income taxes paid to the government.

The multi-step income statement details the gains or losses of a business, in a specific reporting period. Its format separates a company’s operating revenue and operating expenses from its non-operating revenue and non-operating expenses. In a multi step income statement,  business activities are separated into operating activities and non-operating activities. Non-operating items, including non-operating revenues, non-operating expenses, and non-operating gains (losses), are shown separately from operating revenues and operating expenses. With this separation in financial reporting, you can analyze ongoing business operations separately from non-operating items. The operating section contains information about revenues and expenses of the principle business activities.

# 1 – Operating Head – Gross Profit

Once the non-operating section is totaled, it is subtracted from or added to the income from operations to compute the net income for the period. Hence, the potential investors and creditors will gain better clarity of your company’s financial footing, which helps boost your chances of getting funding and bank loans. There are two methods to calculate the Cost of Good Sold such as by using periodic method or perpetual method.

Multi-step income statements are one of the two income statement formats businesses can use to report their profits. A multi-step income statement reports a company’s revenues, expenses and overall profit or loss for a specific reporting period. It is a more detailed alternative to the single-step income statement and uses multiple equations to calculate a business’s net income. A simple multiple step income statement separates income, expenses, gains, and losses into two meaningful sub-categories called operating and non-operating. The multi-step income statement shows important relationships that help in analyzing how well the company is performing. For example, by deducting COGS from operating revenues, you can determine by what amount sales revenues exceed the COGS.

Products

In the above example, we follow the periodic format to compute the Cost of Goods Sold. In a perpetual system, the Cost of Goods Sold is added at the time of the transaction instead of using a periodic difference. The sales account is the total amount of sales derived from selling the company’s goods and services.

The gross profit and the operating profit figures are calculated in the operating section of a multi-step income statement. The operating expenses are sub-classified into cost of goods sold, selling expenses and administrative expenses. The gain may be a one-time item such as a winning lawsuit or insurance settlement.