MULTI-STEP INCOME STATEMENT: Meaning And Examples

multi-step income statement
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An Income Statement is the summary of a company’s financial net sales, expenditure, and earnings. They are also called profit and loss statements, an income statement is one of the significant financial statements prepared by businesses as part of their financial accounting along with a balance sheet and a cash flow statement. However, there are two types of income statements which is the multi-step income statement and the single-step income statement in this article let’s study the multi-step income statement, how to prepare a multi-step income statement,multi-step income statement example, and single-step vs multi-step income statement.

What Is a  Multi-Step Income Statement?

The multi-step income statement is one of the two-income statement formats businesses use to report their profits. A multi-step income statement is a format that separates the total revenue and expenditures into operating and non-operating heads. These operating heads are also known as(Indirect costs) while the operating heads are also knowns as ( Direct costs), direct costs are the expenses a firm incurs directly for a product or service while the indirect costs are the generalized expenditure of a company such as rent, utilities, and salaries. Above all, it enumerates all these items in different sections, which makes it convenient for the users to gain an understanding of core business operations in a better way.

Meanwhile, it provides a detailed look at the company’s financial status offering details about the company’s growth.  Most firms use it because it renders a profound analysis of margins and provides a more accurate representation of goods sold.

Why Do Companies Use Multi-Step Income Statements?

The greatest advantage of a multi-step income statement is that it separates operating income from other types of income. This clears up the company’s finances and puts the most important part—the operational part—in the spotlight.

Components of a Multi-Step Income Statement

  They are:

#1. Operating Head – Gross Profit:

This is the first section of the income statement and is obtained by deducting the cost of goods sold from the total sales. Above all, it represents how much profit a company obtains in manufacturing or selling its products. Gross profit is used by creditors to show the company’s capability to meet arising debt and to pay back outstanding credit. Most importantly, Investors also use the gross profit to ascertain the profitability of primary business activities. Therefore, when calculating gross profit, no other expenditures are included piecemeal from the cash flux from the trade of goods and cash exodus from the purchase of goods.

#2. Operating head- Selling and Admin Expenses:

This is the second component of the income statement. Selling expenses are the cost incurred when selling the product to customers and shall also include advertising expenses and the salary of the sales personnel, Administrative expenses are indirect expenses that are related to the sale of goods and might include the salary and rental expenses. The addition of both gives the operating charges, and when we abate the same from the gross profit, we arrive at the operating income. 

#3. Non-operating head Items:  

Lastly, this last component of the income statement lists all business incomes and costs that are not related to the primary activities of the business. It includes the non-operating expenditures, revenues, gains, and losses which, when added to the operating income, give us the resultant the net income for the period.

Prepare a Multi-Step Statement Income 

In order to prepare a multi-step income statement, it requires a three-step computation.

#1. Calculate the Gross profit:

 This is done by subtracting the cost of goods from the total sales.

Total sales$800 000
Cost of goods sold$1 000 000
Gross profit$200  000

#2. Calculate the operating income:

This is the second step used and is done by subtracting the operating expenditures from gross profit.

Gross profit$200  000
Operating ExpensesUtility$5000
Rent$25 000
Salaries$150 000
Operating income$20 000

#3. Calculate the net income:

Lastly, this is done by adding the income from operating heads and the sum-up of all the non-operating heads.

Gross profit$200 000
Operating income$20 000
Non-operating income
TaxesInterest revenue
$2500
$1500
Net income24 000     

Multi-Step Income Statement Example

For example, a company provided an adjusted balance as shown. Prepare a multi-step income statement using the multi-step income statement example below.

Example

From the multi-step income statement example we have:

Sales                                             850 000

Cost of goods sold                         980 000

Advert expenses                                11 000

Salaries                                               40 000

Office expenses                                     4 000

Interest expense                                      1500

Gain on disposal of office equipment         2500

Solution 

Gross profit
Cost of goods sold minus Sales
$130 000
Operating income
Gross profit minus submersion of all operating expenditures
$75 000
Net income
Submersion of operating expenses and others
$79 000
Net Income$ 79 000

Single-Step vs Multi-Step Income Statement

In contrast single step vs multi- single-step income statement gives a plain account of a business’s net income. The single-step income statement offers an easy accounting of the financial activity of your business, it’s easy to understand and prepare. Therefore, the equation utilized in a single-step earnings report is: Net Income= (Revenues + Gains) – (Expenses + losses). However, the multi-step format takes more time to prepare because it uses several degradations of expenses and revenue.

In contrast, the single-step statement of income uses a single calculation to determine net income. The multi-step income statement includes net sales accounts (revenues, expenses), while the Single-step income statement groups all revenues and expenses together without calculating subtotals. A multi-step income statement is more thorough than a simple income statement,, because of this, it is mainly selected by many companies whose businesses are more complex. Furthermore, each income and expense account is listed individually under the suit category on the statement.

A single income statement is less detailed than a multi-step layout. A simple income statement consists of all revenues into one category, followed by all expenses, to produce net income.

What Is the Difference Between an Income Statement and a Multi Step Income Statement?

The primary purpose of a single-step income statement is to report the net income of the business using a single computation. A multi-step income statement is more comprehensive and determines the company’s gross profit and operational income using various formulas and a detailed breakdown.

Conclusion

Single-step and multiple-step are the two types of income statements that companies use for accounting purposes. However, the single-step vs multi-step income statement also entails that the multiple-Step statement provides an in-depth look at a company’s financial status, offering details about the company’s wellbeing while the single-step statements provide an alkaline look at a company’s income and expenses, enabling record-keeping easier for business investors.

In conclusion, companies may choose the format that most accurately fits their needs, some might choose a mixture of both the multi-step and straightforward earnings report formats. The multi-step earnings report could also be more beneficial for internal use and management decision-making due to the detail in account information. That is to say, a simple earnings report could be more appropriate for external use, as a summary for investors and lenders.

FAQs On Multi-step income statements

Define a multi-step income statement?

A multi-step income statement is a format that separates the total revenue and expenditures into operating and non-operating heads. These operating heads are also known as(Indirect costs) while the operating heads are also knowns as ( Direct costs), direct costs are the expenses a firm incurs directly for a product or service while the indirect costs are the generalized expenditure of a company such as rent, utilities, and salaries.

How can one calculate a multi-step income statement?

It requires a three-step calculation which includes calculating the gross profit, the operating income, and the net income.

What is the advantage of using multi-step income statement to calculate your business profit?

The multiple-Step statement also income provides an in-depth look at a company’s financial status, it also helps firms to make decisions without extra calculations thereby saving time and resources.

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