Multi-Step Income Statement is the income statement of the company which segregates the total operating revenue of the company from non-operating revenue and total operating expenses of the company from non-operating expenses thereby separating the total revenue and expense of a particular period into two different sub-categories i.e., operating and the non-operating.
What is Multi-Step Income Statement?
A Multi-Step Income Statement is a statement that differentiates among the incomes, expenditures, profits, and losses into two important sub-categories that are known as operating items and non-operating items.
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 side, the format of the single-step income statement all the revenues are altogether combined under one main head, i.e., income listing and all the expenditures are put together under Expenses head.
Format of a Multi-Step Income Statement
Below is the Format of Multi-Step Income Statement. It is divided into two main headings – Operating Head and Non-Operating Head
The Operating head is further divided into two important headings, which list down primary business incomes and the expenditures. It is usually known as Trading Account as well where Direct Incomes and Expenses are mentioned.
# 1 – Operating Head – Gross Profit
The format of the multi-step income statement 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. 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.
For example, the Multi-step income statement of the retailer will have the figure of total sales that includes all the merchandise sales that are made during that period, and the cost of goods sold includes all the expenditures incurred while purchasing, shipping, or conveyance, and getting the merchandise ready for sale. Gross margin is the amount that the company earned from the sale of their merchandise. The thing to be noted is that no other expenditures are included yet. It is simply Cash Inflow from Merchandise sales and Cash Outflow from the purchase of the merchandise. This section helps in measuring the health of business plus the profitability of core business activities.
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#2 – Operating Head – Selling and Admin Expenses
The format of the multi-step income statement contains Selling and Admin Expenses as the second section. It notes down all operating expenses of a company in two different categories that are Selling and Administrative.
- Selling Expenses – Expenditures incurred to sell the products. Expenditures like advertising, the salary of a salesman, freight, and commissions are included in selling expenses.
- Administrative Expenses- Expenditures which are indirectly related to the selling of the product like the salary of the office staff, rent, and supplies are treated as
Both selling and administrative expense 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 computed above in the first section.
#3 – Non-Operating Head
The format of the multi-step income statement contains Non-Operating Head as the third section. The non-operating and the other head lists down all kind of business incomes and expenses which are not related to the principal activities of a business. Say, for instance, a retailer is not into the insurance business, and a car hit 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. Hence, it will come in the non-operating and other heads.
- Other returns and expenses like lawsuit settlements, interest, losses, and gains from investments and any extraordinary items come under this head. There are no sub-categories in the non-operating head as they were under the operating head. It just lists down all kinds of activities and totals them in the end.
- Once all the items of Non-operating head are totaled, the net income for the period is computed by deducting or adding the total of the non-operating head from or to the income from operations.
Multi-Step Income Statement Example
Let us prepare a multi-step income statement with the help of an example
Step #1 – Prepare Gross Profit Section
The following table shows the calculation of Gross Profit
Gross Profit = Total Sales – Cost Of Goods Sold
- Since,Gross Profit = $50,000,000 – 40,000,000
- Gross Profit = $10,000,000
Step 2 – Operating Head – Prepare Second Section Showing Operating Income/ Profit:
The below table shows the calculation of Operating Income
Operating Income = Gross Profit – Total Operating Expenses
- Since,Operating Income = $10,000,000 – 5,200,000
- Operating Income = $4,800,000
Step 3 – Prepare all the non operating Heads
The below table shows the calculation of Net Income
Net Income = Income from Operations+ Total of Non-Operating and Other Head
- Since,Net Income = $4,800,000 + $500,000
- Net Income = $5,300,000
Benefits of Multi-Step Income Statement
- A Multi-Step Income Statement helps analyze the overall performance of a business. Creditors and investors can evaluate how efficiently an organization is working and performing.
- One can easily judge how a company is performing its important functions indifferent from the other activities done by the company.
- Like for a multi-step income statement example, the main function of a retailer is to sell his merchandise, and the creditors and the Investors are keen to know that how well and conveniently that retailer is able to sell his merchandise without any dilution in the numbers together with the other profits and the losses from the non-merchandise related sales. Now in order to check them, all expenditures and incomes cannot be clubbed together but are to be listed separately into some proper heads, which are meaningful and easy to understand. For this purpose, a Multi-Step Income Statement is a solution.
Multi-step income statement format is any day better than a single-step statement as it provides proper detailing. But, if it is not prepared correctly, then it can be misleading. The management of the company might shift the expenses from the cost of goods sold and into the operations to improve their margins artificially. Basically, it is very significant to view the comparative financial statements over time, so that one can see and judge the trends and then possibly catch the misleading placement of the expenditures.
This article has been a guide to what is Multiple-Step Income Statement. Here we discuss the multi-step income statement format and how to prepare it along with practical examples and benefits. You may learn more about our articles below on accounting –