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

By creating a multi-step income statement, companies can better understand their revenue streams, cost of goods sold, and operating expenses, leading to more informed decision-making and strategic planning. Overall, using the multi-step income statement benefits companies seeking a more detailed and comprehensive overview of their financial performance. 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. To understand a detailed multi step income statement for financial accounting, consider its formulas for income statement sections.

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A single-step income statement includes just one calculation to arrive at net income. 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.

• Companies use the multi-step income statement and the balance sheet for financial ratios analysis.
• 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.
• The operating expenses are sub-classified into cost of goods sold, selling expenses and administrative expenses.
• As already highlighted, operating activities are those directly related to the core business operations, such as sales revenue and cost of goods sold.

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At the top section of this income statement, to compute the gross margin, subtract the cost of good from the net sales. For instance, the gross margin of XYZ Company is a total of $340,000 ($490,000 – $150,000). Smaller businesses may use the more simplified single-step income statement, unless otherwise required by their creditors or lenders. Typically, larger companies will use the multi-step income statement as it provides more valuable details to its many investors and lenders. The third and final component of the multi-step income statement is net income (the “bottom line”), which represents the net profitability of a company per accrual accounting standards.

There are two methods to calculate the Cost of Good Sold such as multi step.income statement by using periodic method or perpetual method. 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. Having the additional breakdown is useful for lenders and investors to understand the business better and decide whether a company is worth working with.

• One crucial component of financial reporting is the income statement which summarizes the revenues and expenses incurred over a specific period.
• 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.
• They’re often preferred by publicly traded companies and for external financial reporting purposes.
• Unlike the operating section, the non-operating section is not split into subcategories.
• It might have lost money from its operations but had a huge insurance settlement that pushed a profit to the bottom line.

If a multi step income statement correctly shows the components of Gross profit and separates Operating expenses from Non-operating expenses, accountants can use it to comply with generally accepted accounting principles (GAAP). Generally, businesses that use multi-step income statements are large, complex companies. Most small businesses and sole proprietorships can get by with just a single-step income statement, since their operations and accounting tend to be straightforward.

The users will know the profit earned from the primary activities of buying and selling goods and how it differs from the non-operating activities. A multi step income statement is one of the statements used in financial modeling, along with the balance sheet and the cash flow statement. Financial modeling entails using forecasts of a particular company’s financial statements. The multi step income statement shows a company’s income and expenses step-by-step and provides insight into where the company makes its money. The income statement sometimes referred to as the profit and loss statement is one of the three main financial statements of a business.

How to Prepare a Multi-Step Income Statement

The Revenue account shows the revenue generated by normal business activities that includes any deductions and discounts given to customers. Here is one example of a multi-step income statement format for XYZ Company for the year 2020. For instance, interest expense is a non-operating cost since the item pertains to the financing activities of a company rather than any of its specific operating activities.

You should add the interest income and non-operating gain and subtract the interest expense and income tax expense from operating profit. Operating profit can then be calculated by taking the gross profit and subtracting operating expenses. On this multi-step income statement, the operating expenses are listed as selling, general, and administrative expenses. The multi-step income statement template contains Gross Profit as the first section. The calculation of the first section shows the gross profit of business by deducting the cost of goods sold (COGS) from the total sales.

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Accountants can use the contribution margin to analyze the company’s break even point and its margin of safety. Margin of safety is the amount of a company’s profit after subtracting its break-even point. 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. For instance, if your business is charged with 10% of tax expense from a total of $60,000 of net income, thus, your business will have to bear $6,000 of tax expense. 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.

This is the amount of money the company made from selling its products after all operating expenses have been paid. If a company’s operations are strong, it will almost always show a profit at the bottom line, but not all companies with a profitable bottom line have strong operations. It might have lost money from its operations but had a huge insurance settlement that pushed a profit to the bottom line. Many companies use the multi step income statement as one of their key financial reports. Three of the most popular accounting software solutions – QuickBooks, Xero, and Sage Intacct, all allow for creating multi step income statements.

Nonoperating revenues and expenses appear at the bottom of the income statement because they are less significant in assessing the profitability of the business. 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 operating section contains information about revenues and expenses of the principle business activities. The gross profit and the operating profit figures are calculated in the operating section of a multi-step income statement.

The single-step income statement offers a straightforward accounting of the financial activity of your business. Preparing a multi-step income statement is a more complex process than creating a single-step report. Here are the steps you need to follow to create a multiple-step income statement for your business. An example of a single step income statement is Dana Incorporated’s Consolidated Statement of Operations for the calendar years ended December 31, 2021, 2020, and 2019. The gain may be a one-time item such as a winning lawsuit or insurance settlement. 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.

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. One of the important features of the multiple-step income statement is the sub-total for operating income.

Unlike the single-step income statement that uses only one accounting equation to compute the net profit, businesses will need to use multiple accounting equations to derive at the bottom line. This sample multi-step income statement from Accounting Coach shows the layout of a multi-step income statement with the separation between operating and non-operating activities. 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. 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.