Multi-Step Income Statement Component and Uses with example

The header of your multi-step income statement conveys important information to readers. 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. The single-step income statement is the simplest income statement format, calculating revenue totals and subtracting expenses to arrive at net income. The third section is the non-operating head, which lists all business incomes and expenses that are not related to the principal activities of the business. An example of a non-operating expense is a lawsuit claim paid by the company as compensation to an aggrieved party after losing in a court case. Also, a non-operating income can be an insurance compensation paid by an insurance firm to the company’s account as settlement proceeds for damage or loss of a company’s asset.

Another measurement available from the multi-step income statement is operating income. Like gross profit, operating income provides business owners with more detailed information on company profitability rather than focusing solely on net income. This is the amount of money the company made from selling its products after all operating expenses have been paid.

Next, we will subtract cost of goods sold from sales revenues to arrive at gross profit. The required information has been provided to us in the form of the adjusted trial balance. Looking over the company’s operations, we are made aware that lending, borrowing, and investing are not part of the company’s core operations.

DRAWBACKS OF MULTI-STEP INCOME STATEMENTS

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. It lists items in different categories to make it convenient for users of the income statement to better understand the core operations of the business. Multi-step income statements are income statements that split the total revenue and expenses into two categories; operating and non-operating. These statements provide an in-depth look at the overall financial performance of a business during a set period. Everything on the statement is listed into different categories so it’s easier for business owners and readers to understand the core business operations and the success – or failure – of those operations.

A multi step income statement includes subtotals for gross profit, operating expenses, and non-operating expenses. A single step income statement lists line items for revenues and costs and expenses with no subtotals, reaching a total for net income (loss) as the bottom line. The multi-step income statement details the gains or losses of a business, in a specific reporting period.

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A multi-step income statement is an alternative to the single-step income statement. This includes the costs of goods sold, advertising expenses, administrative expenses, and employee salaries. Administrative expenses include things such as rent and office equipment and supplies. We’re now ready to calculate operating income by subtracting the remaining operating expenses from gross profit.

The top section of your multi-step income statement covers your total operating activities. First, add your operating revenues, which is the sales revenue generated from selling your goods or services. The total operating expense of the business stands at $19,000, and thus to arrive at the operating income, we deduct the operating expense from the gross profit to arrive at a value of $131,000. The total non-operating values are added, bringing us to an estimated $33,000. Finally, to arrive at the net income, we add the operating and non-operating income to arrive at the value of $164,000. Another benefit is that a multi-step income statement shows the total revenue that can be attributed to primary business activities, including sales from things other than merchandise.

How to Prep a Multi Step Income Statement: Example, Pros & Overview

When calculating gross profit, no other expenditures are included apart from the cash inflow from the sale of goods and cash outflow from the purchase of goods. One of the key advantages of this type of income statement is how much detail it offers. This detail allows lenders, investors, and other key figures and stakeholders to get a better look at the performance of a business. These stakeholders need to have as much access to the gross margin of a business as possible. The gross margin is compared to the past gross margins and the gross of comparable entities to determine how efficient and successful the company is. Readers of a multi-step income statement get an overall look at how the primary business activities of a business are generating revenue and how those practices affect costs compared to non-primary activities.

• Whereas, non-operating income and expenses are those items that don’t result from normal business operations, such as interest expenses or investment gains.
• Lastly, you can see the non-operating and other section being subtracted to compute the net income.
• If your operating items under performed and your non-operating items overachieved, being able to see the two can become a drawback.
• In a true single-step income statement with no subtotals, line items for net revenues and costs and expenses are listed with a single total for Net income (loss).

Also, its compulsory for publicly traded companies to prepare the multi-step income statements based on the government’s requirements for statutory compliance. By adding the operating income and non-operating income, you should be able to compute the company’s bottom line after deducting the income tax expense. Unlike the single-step income statement that why is accounting important uses only one accounting equation to compute the net profit, businesses will need to use multiple accounting equations to derive at the bottom line. A multi-step income statement reports much of the same general information included in a single-step income statement, but it uses multiple equations to determine the net income, or profit, of the company.

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Single-Step vs. Multi-Step Income Statements

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 net profit for a business. For example, they include several income and expense categories, they present net income as a separate line item, and they often include a reconciliation of net income to cash flow from operating activities.

Consequently, when such a change is made, the nature of the change should be described in the footnotes that accompany the financial statements. A single-step income statement offers a simple report of a business’s profit, using a single equation to calculate net income. A multi-step income statement, on the other hand, separates operational revenues and expenses from non-operational ones and follows a three-step process to calculate net income. Income statements, also called profit and loss statements, are one of the major financial statements prepared by businesses. A multi step income statement is a company’s financial statement in a format presenting revenues, costs, and expenses for a specific reporting period.

Investors and creditors want to know how efficiently the retailer sells its merchandise without diluting the numbers with other gains and losses from non-merchandise related sales. At the bottom of the income statement, under the operating activities, is where you put the section for non-operating activities. Include the income and expenses from these non-operating activities, such as interest on and the purchase or sale of investments. 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.

List Operating Expenses

Its format separates a company’s operating revenue and operating expenses from its non-operating revenue and non-operating expenses. 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. If this margin, called gross margin, is lower than desired, a company may need to increase its selling prices and/or decrease its COGS. The classified income statement subdivides operating expenses into selling and administrative expenses.

Before you prepare your income statement, you need to select a reporting period. Publicly traded corporations are required by law to prepare financial statements both quarterly and annually. Companies with many different sources of revenue should create a multi-step income statement.

It focuses on net income, so it is especially helpful if you need to make an assessment that is based on your business’s bottom line. 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. 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.

Readers will know how much profit comes from primary activities such as buying and selling products and services, and how this performance differs from the activities unrelated to business operation. Non-operating revenues and expenses are then added to or subtracted operating income in order to calculate income before taxes. Non-operating items are those revenues and expenses that do not pertain to the company’s normal operations such as dividend income, interest income and expense, and income tax expense. The multi-step income statement breaks down operating revenues and operating expenses versus non-operating revenues and non-operating expenses. This separates revenues and expenses that are directly related to the business’s operations from those that are not directly tied to its operations. A single-step income statement offers a simplified snapshot of a company’s revenue and expenses.

A multi-step income statement is more detailed and calculates the gross profit and operating income of the business using multiple calculations and an itemized breakdown. Single-step income statements aren’t very helpful for financial decisions that require more in-depth information about a business’s financial health than simply looking at its net income. When assessing a business’s financial performance, you’ll need more than just a single-step income statement. With a multi-step income statement, income, expenses, gains, and losses are categorized into operating and non-operating to show a business’s financial performance. It is possible that management could deliberately shift expenses out of the cost of goods sold category and into operating expenses in order to falsely imply an improvement in gross margins.

The multi-step income statement is the type of income statement you are likely to see most often. It is formatted with operating revenues and operating expenses separate from the non-operating revenues, non operating expenses, gains, and losses. 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.