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. As the name suggests, it’s called “multi step” because it involves breaking all expenses, income, gains, and losses into operating and non-operating categories. This division helps achieve a clear picture of a company’s performance, its ability to generate revenues, and its overall financial health. A multiple step income statement is one of the two common types of income statements in financial reporting. It’s important to note that the accuracy and adequacy of the multi-step income statement directly influence the understanding of a company’s financial performance.

What is a multi step income statement?

The net income represents the company’s overall profit after accounting for all revenues, expenses, and taxes, clearly indicating the business’s financial health and profitability. 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. If you’re new to preparing income statements or unsure how to structure it, we have a pre-made free income statement template that you can use to simplify the process.

Big corporations tend to prepare the multi-step income statement due to the size and complexity of their businesses. These businesses, such as large manufacturing companies and giant retailers, usually have various revenue streams, and they will need to record down the income in different accounts. Smaller businesses may use the more simplified single-step income statement, unless otherwise required by their creditors or lenders.

Types of Business that Use Multi-Step Income Statement

Businesses may include a subtotal for Total expenses in a single-step income statement. Management accountants and financial analysts use other types of multi-step income statements, showing separate sections for fixed and variable costs or direct and indirect costs. The components of the multi-step income statement comprise three equations that calculate a profit metric that each measures a unique attribute of the underlying company’s financial performance.

The content on this website is provided “as is;” no representations are made that the content is error-free. Barbara is a financial writer for Tipalti and other successful B2B businesses, including SaaS and financial companies. She is a former CFO for fast-growing tech companies with Deloitte audit experience. When she’s not writing, Barbara likes to research public companies and play Pickleball, Texas Hold ‘em poker, bridge, and Mah Jongg.

Understanding the Accounting Equation and Formula

It also includes extraordinary items of revenues and expenses which are infrequent and unusual such as loss due to natural calamity. The key components of a multi-step income statement include gross profit, operating income, non-operating incomes and expenses, and the final net income. By incorporating these elements, a multi-step income statement offers a more detailed representation of a company’s financial activities, aiding the stakeholders in understanding the financial performance more comprehensively. The gross margin computes the amount of money the company profits from the sales of its merchandise.

  • The multi-step income statement template contains Gross Profit as the first section.
  • This would include large manufacturing businesses as well as large, complex retailers.
  • This understanding is pivotal in making informed decisions, formulating effective business strategies, and addressing any underlying financial performance issues.
  • The single-step income statement offers a straightforward accounting of the financial activity of your business.
  • In the above example, we follow the periodic format to compute the Cost of Goods Sold.
  • You should add the interest income and non-operating gain and subtract the interest expense and income tax expense from operating profit.

Multi step income statement: Multi Step Income Statement Example Template Explanation

  • 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.
  • Another application for a multiple-step income statement is dividing costs into direct and indirect costs for cost accounting by management accountants.
  • It provides insights that financial statement users need when reading a profit and loss statement prepared using GAAP accounting standards.
  • The top section of your multi-step income statement covers your total operating activities.

This could be considered a form of financial statement fraud, and can only be perpetrated when the multi-step format is used, since readers are focusing on the content of the presented subtotals. The multi-step income statement allows for identifying trends and insights through the detailed data provided, enabling stakeholders to understand the dynamics of the company’s financial performance over time. This understanding is pivotal in making informed decisions, formulating effective business strategies, and addressing any underlying financial performance issues. By analyzing trends and comparing these measures over different periods, stakeholders can identify potential areas for improvement and make informed strategic decisions.

Steps to create a multi step income statement

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. In comparison, a single-step income statement gives a simple record of financial activity. 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.

However, the choice of the format depends on the type of company, its rules, regulations and needs. It should also take into consideration the requirements and preference of users who will refer to the statements for making financial decisions. Accounting sync apps help businesses create detailed and accurate P&L reports, and Synder is one of the best tools for this task, as it provides all the necessary financial data.

Comprehensive Guide to Inventory Accounting

A meticulously prepared statement provides stakeholders with a detailed breakdown of the company’s financial activities and aids in assessing its operational efficiency and profitability. Overcoming these challenges is crucial as the accurate preparation of the income statement significantly impacts the financial reporting, influencing the decisions made by the stakeholders and potential investors. A very small business like a sole proprietorship is more likely to prepare a single step income statement. Right after computing the total operating income, the other revenues and expenses section is the revenue and expense incurred from non-operating activities. Starting off, the gross profit is equal to the revenue generated by a company in a pre-defined period minus its cost of goods sold (COGS), which are the direct costs incurred as part of its core business operations. Thus, it provides a complete breakdown of the revenue and expense list in the income statement.

It would be reported in the non-operating and other section because it doesn’t have anything to do with sales. Gather all the necessary financial information for the reporting period, multi-step income statement which could be a quarter or a year. 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.

In contrast to a multi-step income statement, the Dana Incorporated income statement is single-step mainly. The income statement doesn’t show Gross profit, separate and calculate Total Operating expenses, or calculate Total 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.

A multi step income statement is important because it provides the company, investors, lenders, and other stakeholders deep insight into a company’s financial performance during a period of time and its operating trends. The report will reflect the breakdown of the company’s revenue and expense accounts into operating and non-operating business activities in every multi-step income statement. Hence, it provides readers in-depth details of the income and expenses incurred during business operations. The multistep income statement gives far more detail than the single step statement, but it can also be more misleading if not prepared correctly.