Multi Step Income Statement: What Is It and Do I Need One?

The classified income statement subdivides operating expenses into selling and administrative expenses. Thus, statement users can see how much expense is incurred in selling the product and how much in administering the business. Statement users can also make comparisons with other years’ data for the same business and with other businesses.

For instance, if a retail company doesn’t prepare a multi step income statement, their financial report might only show total revenue and total expenses, which would give only the basic profitability. However, in the case of multi step income statement, the company will be able to subdivide its revenue according to the type of sales, such as sales revenue from different products or regions. To add more visibility, expenses can be grouped into costs of sales, selling, general and administrative expenses including wages and rent, and other expenses like interest charges. This way, a multi step income statement will allow the company to determine the level of profitability of each product line, determine where it can cut costs, and measure the overall effectiveness of the business. For example gains/losses on sales of investments or fixed assets, interest revenue/expense etc. It also includes extraordinary items of revenues and expenses which are infrequent and unusual such as loss due to natural calamity.

Single Step Statement Example

The final step in creating a multi-step income statement is calculating net income. If you’re new to preparing income statements or unsure how to structure it, we have a pre-made free income statement template that you can use to simplify the process. Given the gross profit of Apple for each period, the next step is to subtract operating expenses to determine the company’s operating profit in each fiscal year.

Operating revenues:

Synder makes it easier for businesses to manage their day-to-day bookkeeping, maintain accurate and complete financial records, and gain insights into their operations. So, if you’re tired of doing everything manually and chasing down your transactions, give Synder a try. The Revenue account shows the revenue generated by normal business activities that includes any deductions and discounts given to customers. The following example illustrates the format of a typical multi-step income statement.

Comprehensive Guide to Inventory Accounting

For instance, the gross margin of XYZ Company is a total of $340,000 ($490,000 — $150,000). An example of a multi step income statement is Arrow Electronics, Inc.’s Consolidated Statements of Operations for the calendar years ended December 31, 2021, 2020, and 2019. It’s available as a 10-K company filing in the SEC’s EDGAR database dated February 11, 2022.

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. A multi-step income statement is an income statement that segregates total revenue and expenses into operating and non-operating heads. It offers an in-depth analysis of the business’s financial performance in a specific reporting period.

The selling expenses are the costs incurred when selling goods to consumers and may include marketing expenses, the salary of sales personnel, and freight charges. That means before figuring out how much profit or loss during the period, we need to find the operating revenues, operating expenses, and non-operating income as well as non-operating expenses. By analyzing trends and comparing these measures over different periods, stakeholders can identify potential areas for improvement and make informed strategic decisions.

• A multiple-step income statement is also the template approved to be used by IFRS.
• 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.
• However, because of large sales commissions and delivery expenses, the owner(s) may realize only a very small amount of the gross margin as profit.
• Generally, businesses that use multi-step income statements are large, complex companies.
• Operating income, another critical element, reflects the profit generated from a company’s core business operations.

Add the final number as a line item under the cost of goods sold and title it Gross Profit. It is good to know that non-operating activities are activities that are not related to the entity’s main operation. Once we include all of the non-operating items, we will get net profit or net income.

It is an important figure for the creditors, investors, and internal management as it depicts how profitable a company is at selling the goods or making the products. A multiple step income statement is one of the two common types of income statements in financial reporting. Management accountants and financial analysts use other types of multi-step income statements, showing separate sections for fixed and variable costs or direct and indirect costs.

Disadvantages of Multiple-Step Statements

The selling and administrative expense sections are added together to compute the total operating expenses. This total expense line is subtracted from the gross profit computed in the first section to arrive at the company’s operating income. The operating section is subdivided into two main sections that list the primary business income and expenses. The first section computes the gross profit of the business by subtracting the cost of goods sold from the multiple step income statement total sales. This is a key figure for investors, creditors, and internal management because it shows how profitable the company is at selling its goods or making its products.

Another application for a multiple-step income statement is dividing costs into direct and indirect costs for cost accounting by management accountants. This financial report format can be generated automatically by your business accounting software or ERP system. After review and approval by financial management, it can be distributed to authorized internal users. Publicly traded corporations are required by law to prepare financial statements both quarterly and annually. Preparing statements monthly can help you track changes in your profits over time.

The most important of which are the gross profit and the operating profit figures. The single-step income statement skips the calculation of gross profit and operating profit, instead focusing on the bottom line– net income. The multi-step income statement calculates gross profit, operating profit, and net income. The cost of goods sold is separated from the operating expenses and listed in the gross margin section. This is particularly important because it gives investors, creditors, and management the ability to analyze the financial statement sales and purchasing efficiency. Gross profit is the first section of a multi-step income statement, and it is obtained by deducting the cost of goods sold from the total sales.

Format

Instead of just having the revenue, expenses, and net income like a traditional income statement, a multi-step income statement has a more detailed breakdown with components such as gross profit and operating profit. An income statement is an essential financial document a company prepares to describe its business activities over a given reporting period. This financial summary of a company’s revenue, expenses, and earnings is typically presented as part of a package that also includes a company’s balance sheet and cash flow statement. The income statement sometimes referred to as the profit and loss statement is one of the three main financial statements of a business. Consequently to understand the multi step income statement we first need to understand what is meant by a single step income statement.

• A multi-step income statement includes subtotals for gross profit, operating expenses, and non-operating expenses.
• To illustrate a typical real life example of a multi step income statement is shown below.
• However, the company might generate some income from interest income that it deposits in the banks.
• Also, its compulsory for publicly traded companies to prepare the multi-step income statements based on the government’s requirements for statutory compliance.
• To understand a detailed multi step income statement for financial accounting, consider its formulas for income statement sections.

It is important to realize that in the multi-step income statement, other income and other expenses are shown below the operating income line. As before other income represents income from interest, dividends, rents, and gains from asset disposals; other expenses represents expenses for interest, and losses on asset disposals. The multi-step income statement allows for identifying trends and insights through the detailed data provided, enabling stakeholders to understand the dynamics of the company’s financial performance over time. This understanding is pivotal in making informed decisions, formulating effective business strategies, and addressing any underlying financial performance issues. Operating income, another critical element, reflects the profit generated from a company’s core business operations. It provides insights into the business’s ability to generate profits from its primary activities, thus serving as a key metric for assessing operational efficiency.

Each of these relationships is important because of the way it relates to an overall measure of business profitability. However, because of large sales commissions and delivery expenses, the owner(s) may realize only a very small amount of the gross margin as profit. 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. Operating revenues are the revenues that an entity generates from its normal business activities. For example, if the entity is operating as construction services, the revenues from the contractions contracts with its customers are considered as the operating revenues.

The components of the multi-step income statement comprise three equations that calculate a profit metric that each measures a unique attribute of the underlying company’s financial performance. The Multi-Step Income Statement is a financial reporting format where a company’s revenue, costs, and expenses are classified into separate categories before arriving at net income (the “bottom line”). The multiple-step income statement is very useful to users of financial statements because this template clearly classified operating items and non-operating differently.

A multi-step income statement and a single-step income statement are two different formats for presenting a company’s financial performance, particularly its revenues, expenses, and net income. The multi step income statement becomes a must-have for those businesses because it provides a better analysis of the company’s financial performance than the single-step income statement. As the name suggests, it’s called “multi step” because it involves breaking all expenses, income, gains, and losses into operating and non-operating categories.