Multi-Step Income Statement
The income statement is one of the three financial statements. This statement gives you an accurate measurement of company performance, and may also be called a profit and loss statement. An income statement offers an overview of total expenses and revenues across a specific period.
While smaller businesses do well with a single-step income statement, other businesses are sure to appreciate the detail offered by a multi step income statement.
What is a Multi-Step Income Statement?
Multi-step income statements are income statements that split the total revenue and expenses into two categories; operating and non-operating. These statements provide an in-depth look at the overall financial performance of a business during a set period. Everything on the statement is listed into different categories so it’s easier for business owners and readers to understand the core business operations and the success – or failure – of those operations.
Readers of a multi-step income statement get an overall look at how the primary business activities of a business are generating revenue and how those practices affect costs compared to non-primary activities.
What Businesses Use Multi-Step Income Statements?
Large businesses are the most likely to prepare a multiple step income statement. These statements are ideal for businesses with variety in their income and expenses. One example of a business that benefits from a multi step income statement is a manufacturing company. These companies have several revenue sources because they deal with many companies. They should keep a multi-step income statement to get a clear difference between the primary and non-primary business activities.
Some companies are required by law to produce multi-step income statements. Publicly-traded companies, in particular, must know how to prepare a multi step income statement. This is because those companies are under more scrutiny from the public and their private investors. These companies are required to create a multi-step income statement that differentiates between their primary and non-primary activities.
Advantages of a Multi-Step Income Statement
One of the key advantages of this type of income statement is how much detail it offers. This detail allows lenders, investors, and other key figures and stakeholders to get a better look at the performance of a business. These stakeholders need to have as much access to the gross margin of a business as possible. This gross margin is a percentage of the overall net sales. The gross margin is compared to the past gross margins and the gross of comparable entities to determine how efficient and successful the company is.
Given that a multi-step income statement divides operating income and expenses from non-operating income and expenses, these statements help people gain a better understanding of how a business is performing financially. Readers will know how much profit comes from primary activities such as buying and selling products and services, and how this performance differs from the activities unrelated to business operation.
Another benefit is that a multi-step income statement shows the total revenue that can be attributed to primary business activities, including sales from things other than merchandise. By knowing just where the money comes from, businesses can better prepare for the future and create effective goals and strategies for business success.
How to Prepare a Multi-Step Income Statement
For all the advantages a multi income statement offers, there are some disadvantages. One of the most glaring disadvantages is that knowing how to prepare a multi step income statement is more complex than a single-step statement. Here are the steps for how to prepare a multiple step income statement:
- Choose a Reporting Period
The first step in preparing the statement is choosing an accounting period to report on. Income statements are generally prepared for every month, quarter, or year. The law states that publicly traded companies prepare financial statements on a quarterly and annual basis. Preparing monthly statements is a good idea in general, as it shows you the clearest picture of how profits change over the course of the year, which is vital information to have to hand when making financial decisions that affect your business, such as whether now is the right time to invest in new equipment.
- Create the Document Header
Each income statement needs a document header. The header showcases important information readers need to know. The header includes the name of the company and identifies the document as being an income statement. It also includes the accounting period covered in the income statement.
- Add the Operating Revenue
At the top of the income statement is where you put the total operating activities. Start by adding the operating revenues to the document, which is how much money you generate through selling goods and services across the period.
- Add the Operating Expenses
The next thing to add is the total operating expenses. This includes the costs of goods sold, advertising expenses, administrative expenses, and employee salaries. Administrative expenses include things such as rent and office equipment and supplies. If it’s an expense necessary to run your business, it goes in this section.
- Calculate the Gross Profit
You’re now ready to calculate the gross profit for your business. Calculate this by subtracting the cost of goods sold from the net sales amount. Include the final number under the cost of goods sold, marked as “Gross Profit.”
- Calculate the Operating Income
The next step is to calculate the operating income for your business. Similar to calculating gross profit, simply subtract the operating expenses from the gross profit. Include the number in the income statement as a line under the operating activities. The section should be titled “Income From Operations” or “Net Operating Income.”
- Add the Non-Operating Costs and Income
At the bottom of the income statement, under the operating activities, is where you put the section for non-operating activities. Include the income and expenses from these non-operating activities, such as interest on and the purchase or sale of investments.
- Calculate the Net Income
The last stop for knowing how to prepare a multi step income statement is calculating the total net income. You can do this by adding together the operating income and the non-operating income items. Include the total to the bottom of the income statement under the heading “Net Income.” If the final number is positive, then you’re turning a profit. If you end up with a negative number, then you’re operating at a loss.
Multi-Step Income Statement Example
The following is an example of a multi-step income statement. The example shows the layout of the statement and how operating and non-operating costs are separated. It also shows how to calculate the net income for a business:
For the Five Months Ended May 21, 2017
Cost of goods sold
Office supplies expense
Office equipment expense
Total operating expenses
|Non-Operating or other
Gain on sale of investments
Loss from lawsuit
Should Your Small Business Use a Multi-Step Income Statement?
If you operate as a freelancer, consultant, or sole proprietor, then you should be able to get by with a single-step income statement. It’s easier to plan and put together a single-step statement.
However, if you’re considering a bank loan or other investment or are in the middle of a growth period, you should consider adopting a multi-step income statement. These statements include information not found with a standard single-step statement.