What is a Multi-Step Income Statement?: Format, Explanation, Examples
Upgrading to a paid membership gives you access to our extensive collection of plug-and-play Templates designed to power your performance—as well as CFI’s full course catalog and accredited Certification Programs. Fundamentally, the basic premise of either presentation format is conceptually the same, granted the outcome of either method is to arrive at net income.
Gross profit is used by creditors to show the company’s ability to meet arising debt obligations and to pay back outstanding credit. Businesses that are looking to raise funds from investors and creditors are likely to use multi-step income statements as well. When you are trying to ask for money, any smart creditor or investors will want to see how your business is operating. Businesses that use multi-step income statements are typically larger and more complex companies. When it comes to a publicly-traded company, they are required by law to file a multi-step income statement to give greater detail to the users of the financial statement.
- The statement shows the line items gross profit and operating income, which are metrics commonly looked at by management, investors, and creditors.
- Add your revenues and expenses from non-operating activities, including interest and the sale or purchase of investments.
- It’s always important to view comparative financial statements over time, so you can see trends and possibly catch misleading placement of expenses.
Here are the steps you need to follow to create a multiple-step income statement for your business. If you’re a sole proprietor or independent contractor, you can certainly get by using a single-step income statement. But for established businesses as well as businesses looking to apply for a loan or attract investors, a multi-step income statement is worth the extra steps. When calculating operating expenses, don’t include any expenses already included in the cost of goods sold, such as direct labor and materials purchased. If you’re creating a multi-step income statement for the first quarter of 2020, your trial balance should be prepared for the same quarter. However, if your business is in a growth stage, or you’re looking to obtain a bank loan or attract investors, a multi-step income statement provides details that are missing from the single-step income statement.
Because gross profit focuses only on sales revenue and cost of goods sold, business owners have a better idea about how profitable their core business operation really is. Other income and expenses like interest, lawsuit settlements, extraordinary items, and gains or losses from investments are also listed in this section. Unlike the operating section, the non-operating section is not split into subcategories.
What is a Multi-Step Income Statement?
This metric is important for business owners that need more detailed information on both business profitability and financial performance. A multi-step income statement is ideal for large, complex businesses that use a long list of incomes and expenses. 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. Another measurement available from the multi-step income statement is operating income.
- This is the amount of money the company made from selling its products after all operating expenses have been paid.
- 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.
- On the other hand, some investors may find single-step income statements to be too thin on information.
- If you’re still struggling to track your business revenues and expenses in multiple ledgers, it may be time to move to accounting software.
- When it comes to a publicly-traded company, they are required by law to file a multi-step income statement to give greater detail to the users of the financial statement.
Small businesses without a complex operating structure, such as partnerships and sole proprietorships, can often choose a single-step income statement as it requires significantly fewer calculations and is easier to prepare. 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. In the bottom section of your income statement, below your operating activities, create a section for your non-operating activities.
Problems with the Multi-Step Income Statement
Statement users can also make comparisons with other years’ data for the same business and with other businesses. 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 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 includes much of the information found in a single-step format, but it makes use of multiple equations to determine the profit, or net income, of a business. Multi-step income statements break down operating expenses and operating revenues versus non-operating expenses and revenues. This process separates expenses and revenues directly related to the business’s operations from those not directly related to its operations.
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. 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. The multi-step income statement shows important relationships that help in analyzing how well the company is performing.
Disadvantages of Single-Step Statements
The statement shows the line items gross profit and operating income, which are metrics commonly looked at by management, investors, and creditors. In preceding chapters, we illustrated the income statement with only two categories—revenues and expenses. In contrast, a multi-step income statement divides both revenues and expenses into operating and nonoperating (other) items. The statement also separates operating expenses into selling and administrative expenses. The final step in creating a multi-step income statement is calculating net income. The top section of your multi-step income statement covers your total operating activities.
Step 2. Operating Profit Equation
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. Finally, to arrive at the net income, we add the operating and non-operating income to arrive at the value of $164,000. 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. Net Income can be calculated by adding or subtracting the various non-operating expenses from operating profit. On this multi-step income statement, there is interest expense, interest income, a non-operating gain, and income tax expense. You should add the interest income and non-operating gain and subtract the interest expense and income tax expense from operating profit.
With the calculation of operating income, you are able to analyze the operations of the business. If your business is looking to apply for a loan or attract new investment, a multi-step income statement is the best option as it provides investors and creditors with greater financial detail about your business. 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 why is profit a liability and losses are an asset and delivery expenses, the owner(s) may realize only a very small amount of the gross margin as profit. The net profit shows the company’s net profitability after deducting the operating expenses and expenses such as taxes and interest paid on debts. On the other hand, the multi-step income statement requires three steps to complete, resulting in more detail about business operations, making it particularly valuable to investors and financial institutions.
In any case, GAAP gives companies the option of issuing either single-step or multiple-step income statements, depending on how they’re structured. 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. Like COGS, operating expenses are an integral part of the core operating activities of a company. However, operating expenses are not directly related to the revenue model of the company. 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 multi-step (short for multiple-step) income statement is the counterpart to the single-step income statement and is used by a business to report its earnings or losses for a reporting period. It is called the multi-step because of the multiple steps taken to arrive at the net income amount. Single-step income statements are easier to prepare and require less calculations. For many small businesses, the single-step income statement provides all the details you’ll need to assess the financial health of your company.
In short, this approach makes it easier to understand the financial results of a business. 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.