For instance, a retailer is not into the insurance business, and a car hits their store. The insurance company paid an amount out of the settlement so that proceeds received from the insurance company will not be considered in total sales; rather, it will be a non-operating income. The multi-step income statement lists down all these items in different sections or categories, which makes it convenient for the users to gain an understanding of core business operations in a better way. On the other hand, in the format of the single-step income statement all the revenues are combined under one main head, i.e., income listing and all the expenditures are put together under Expenses head. On the other hand, a multi-step income statement follows a three-step process to calculate the net income, and it segregates operating incomes and expenses from the non-operating incomes.
Step 3: Calculate revenue totals
This financial summary of a company’s revenue, expenses, and earnings are typically presented as part of a package that also includes a company’s balance sheet and cash flow statement. A multi-step income statement divides a company’s revenue and expenses into operating and non-operating subtotals. 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. Most publicly-traded companies use multiple-step income statements, which categorize expenses as either direct costs (also known as non-operational costs), or indirect costs (also known as operational costs).
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Direct costs refer to expenses for a specific item, such as a product, service, or project. Contrarily, indirect costs are generalized expenses that go towards a company’s broader infrastructure, and therefore cannot be assigned to the cost of a specific object. Examples of indirect costs include salaries, marketing efforts, research and development, accounting expenses, legal fees, utilities, phone service, and rent. The format of the multi-step income statement contains Non-Operating Head as the third section. The non-operating and the other head list all kinds of business incomes and expenses unrelated to a business’s principal activities.
On this multi-step income statement, the operating expenses are listed as selling, general, and administrative expenses. The non-operating and other section lists all business revenues and expenses that don’t relate to the business’ principle activities. For example, our retailer isn’t in the business of receiving insurance proceeds.
Step 1: Determine your accounting 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. 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. It is simply Cash Inflow from Merchandise sales and Cash Outflow from purchasing the merchandise. This section helps measure the health of business and the profitability of core business activities.
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.
- Operating income and expenses are directly related to the company’s primary business activities, while non-operating income and expenses are not directly related and include transactions such as interest, write-offs, and lawsuits.
- Net Income can be calculated by adding or subtracting the various non-operating expenses from operating profit.
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- The multi-step income statement provides detailed reporting of your company’s revenues and expenses using multiple steps to arrive at net income.
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The above are two different ways of presenting the income statement of a company. So, we get various details of the advantage of a multi-step income statement from the above points. We’re firm believers in the Golden Rule, which is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers. You can also include taxes in this section, what can you deduct on your income tax when you refinance your mortgage or if you’re looking to create EBIT (earnings before income taxes), you can create a separate section for taxes. There are three formulas you need to use for this method of calculating net income. Shaun Conrad is a Certified Public Accountant and CPA exam expert with a passion for teaching.
Operating Profit
Unlike the operating section, the non-operating section is not split into subcategories. The multi-step income statement helps users in analyzing the performance of the business. Investors, lenders, and other key stakeholders monitor the gross margin of the business, which is calculated as a percentage of net sales. The gross margin is then compared to the company’s past gross margins and other comparable entities’ gross margins to determine how efficiently the company is performing. The selling and administration expenses from operating activities are captured in the second section of a multi-step income statement. 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.
It is very useful in the detailed analysis of the company’s financial condition for a specific period. Since the items are clearly listed, it becomes very easy for the users to analyse the core operation of the entity. 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 margin percentage calculation total sales. It shows how profitable a company is in manufacturing or selling its products.
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. Building a cash flow statement from scratch using a company income statement and balance sheet is one of the most fundamental finance exercises commonly used to test interns and full-time professionals at elite level finance firms.
It separates revenues and expenses from activities that are directly related to the business operations from activities that are not directly tied to the operations. A multi-step income statement is ideal for large, complex businesses that use a long list of incomes and expenses. The multi-step income statement categorizes operating and non-operating incomes and expenses.
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. A multi-step income statement also differs from an income statement in the way that it calculates net income. 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.
Operating income measures the amount of income from operations excluding all non-operating income and expenses. One of the important features of the multiple-step income statement is the sub-total for operating income. Notice that net income is the bottom line but it includes a provision for income taxes and also interest expense. A multiple-step income statement presents two important subtotals before arriving at a company’s net income. For a company that sells goods (merchandise, products) the first subtotal is the amount of gross profit.
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. 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. The final step in creating a multi-step income statement is calculating net income.
If a tree hit the building and the insurance company paid out a small settlement, the income would not be reported with total sales. It would be reported in the non-operating and other section because it doesn’t have anything to do with sales. The next step is to subtract the total of your operating expenses from your gross profit in order to arrive at operating income.