{"id":21739,"date":"2023-08-30T09:55:00","date_gmt":"2023-08-30T09:55:00","guid":{"rendered":"https:\/\/businessyield.com\/?p=21739"},"modified":"2023-09-30T14:29:11","modified_gmt":"2023-09-30T14:29:11","slug":"multi-step-income-statement","status":"publish","type":"post","link":"https:\/\/businessyield.com\/accounting\/multi-step-income-statement\/","title":{"rendered":"MULTI-STEP INCOME STATEMENT: Examples, Format & How-to Guide","gt_translate_keys":[{"key":"rendered","format":"text"}]},"content":{"rendered":"\n

One of the two income statement types that firms can employ to report their profits is the multi-step income statement. The revenues, costs, and total profit or loss of a corporation are all reported on a multi-step income statement for a certain reporting period. It is a more sophisticated version of the single-step income statement<\/a> that calculates a company’s net income using numerous equations. Along with a balance sheet<\/a> and a cash flow statement<\/a>, an income statement, often known as a profit and loss statement, is one of three primary financial statements that all firms should prepare as part of their financial accounting. So to help you get started with this, let’s go through some examples, a format, and a guide to help you prepare a multi-step income statement. <\/p>\n\n\n\n

Furthermore, we will discuss some of the benefits of using this option against the single-step income statement. <\/p>\n\n\n\n

What Is a Multi-Step Income Statement, and How Does It Work?<\/span><\/h2>\n\n\n\n

The multi-step income statement shows a company’s profits and losses throughout a given reporting period. It provides an in-depth examination of a company’s financial performance. Its structure distinguishes between operational revenue and operating expenses and non-operating revenue and expenses.<\/p>\n\n\n\n

The multi-step income statement provides insight into how a company’s key business activities create income and affect costs, as compared to the performance of its non-essential activities, by distinguishing between operational and non-operating accounting.<\/p>\n\n\n\n

Read Also: INTERIM FINANCIAL STATEMENTS Guide for Beginners (+ Samples and Template)<\/a><\/p>\n\n\n\n

However, this multi-step income statement format for calculating net income is different from how an income statement calculates net income. To arrive at net income, a single-step income statement uses only one computation. Multi-step income statements, on the other hand, calculate net income using numerous equations. They calculate gross profit and operating income as well, which are not reflected on a single-step income statement. A single-step income statement, on the other hand, provides a straightforward record of financial activities.<\/p>\n\n\n\n

Formulas for Multi-Step Income Statements<\/span><\/h2>\n\n\n\n

For this method of determining net income, you’ll need to employ three formulas.<\/p>\n\n\n\n

The first formula helps you calculate gross profits, which is integral to the preparation of this type of statements.<\/p>\n\n\n\n

Basically, you use this formula to determine gross profit on your income statement:<\/p>\n\n\n\n

Net Sales – Cost of Goods Sold = Gross Profit<\/p><\/blockquote><\/figure>\n\n\n\n

The next formula to pay careful attention to is the operating income formula. The operating income formula is vital to accessing all the information you need to forecast sales<\/a> and business administration. For the most part, this formula pretty straight forward. So, applying it just demands the gross profit and operating expense information.<\/p>\n\n\n\n

Gross Profit – Operating Expense = Operating Income<\/p><\/blockquote><\/figure>\n\n\n\n

Finally, one of the most popular in the accounting world is the net income formula. The Net income formula will help set a lot straight when it comes to calculating the company’s worth. <\/p>\n\n\n\n

In other words, it would help prepare the accounts for prospective investors. <\/p>\n\n\n\n

Operating Income + Non-Operating Items = Net Income<\/p><\/blockquote><\/figure>\n\n\n\n

What Type of Businesses Use Multi-Step Income Statements?<\/span><\/h2>\n\n\n\n

Multi-step income statements are typically used by large, sophisticated firms. And because most small businesses and sole proprietorships’ operations are uncomplicated, they may simply get by with a single-step income statement.<\/p>\n\n\n\n

A multi-step income statement is recommended for businesses with many revenue streams. Large manufacturing companies and large, complicated merchants fall under this category. Plus because public firms are compelled by law to produce more thorough financial reports to illustrate their earnings, they need also create multi-step income statements.<\/p>\n\n\n\n

Read Also: Single Step Income Statement: Definition, Examples, Comparisons &Format<\/a><\/p>\n\n\n\n

How to Prepare a Multi-Step Income Statement With Example <\/span><\/h2>\n\n\n\n

A multi-step income statement is more difficult to prepare than a single-step income statement. The steps for creating a multiple-step revenue statement for your firm are as follows.<\/p>\n\n\n\n

#1. Choose a Reporting Period<\/span><\/h3>\n\n\n\n

You must first choose a reporting period before you can begin preparing your income statement. Income statements are often prepared weekly, quarterly, or annually. However, financial statements are required by law to be prepared quarterly and annually for publicly traded corporations. <\/p>\n\n\n\n

Meanwhile preparing monthly financial statements allows you to track how your profits change over time, which is useful information to have when making financial decisions regarding your firm, such as whether to invest in new machinery.<\/p>\n\n\n\n

#2. Make a Header for your Document<\/span><\/h3>\n\n\n\n

Readers will get essential information from the header of your multi-step revenue statement. It contains your company’s name, identifies the document as an income statement, and specifies the reporting period that the document covers.<\/p>\n\n\n\n

#3. Add Revenues from Operations<\/span><\/h3>\n\n\n\n

Your overall operating operations are included in the top section of your multi-step income statement. To begin, add your operating revenues, which are the proceeds from the sale of your goods or services.<\/p>\n\n\n\n

#4. Add Operating Expenses <\/span><\/h3>\n\n\n\n

Now, in the operating activities column, add your entire operating expenses. This would include the cost of things sold, as well as expenses like advertising, salaries, and administrative costs like office supplies and rent.<\/p>\n\n\n\n

#5. Calculate Gross Profit<\/span><\/h3>\n\n\n\n

Subtract the cost of items sold from the net sales to arrive at the gross profit. Under the cost of goods sold, add the final number as a line item and call it Gross Profit. After that, you’ll need to figure out your operating income.<\/p>\n\n\n\n

Read Also: Accounting balance sheet explained: samples, templates, examples and definition<\/a><\/p>\n\n\n\n

#6. Calculate Operating Income<\/span><\/h3>\n\n\n\n

Subtract your operational expenses from your gross profit to arrive at this figure. Add the final calculation as a line item labeled Net Operational Income or Income from Operations at the bottom of your operating activities section.<\/p>\n\n\n\n

#7. Add Non-Operating Revenues and Expenses<\/span><\/h3>\n\n\n\n

Create a segment for your non-operating operations in the bottom area of your income statement, below your operating activities. Include all non-operating revenues and expenses, such as interest and the sale or purchase of investments.<\/p>\n\n\n\n

#8. Calculate your net profit<\/span><\/h3>\n\n\n\n

Calculating net income is the final stage in preparing a multi-step income statement. To do so, add your operational income and non-operating components together. As Net Income, add the total to the bottom of the income statement. You’re reporting a profit if the number is positive. You’ve made a loss if the total is a negative number.<\/p>\n\n\n\n

Benefits of Using the Multi-Step Income Statement Format <\/span><\/h2>\n\n\n\n

A Multi-Step Income Statement aids in the analysis of a company’s entire performance. Creditors and investors can assess how effectively a company operates and performs.<\/p>\n\n\n\n

It is simple to assess how a company performs its critical functions, regardless of the company’s other activities.<\/p>\n\n\n\n

Basically, the main function of a retailer, as in a multi-step income statement format, is to sell his merchandise. But on the other hand, creditors and investors are often interested in knowing how well and conveniently that retailer is able to sell his merchandise without dilution in the numbers, as well as the other profits and losses from non-merchandise related sales. <\/p>\n\n\n\n

To check them, all expenditures and incomes must now be listed separately under appropriate headings that are meaningful and easy to understand. A Multi-Step Income Statement is a good option for this.<\/p>\n\n\n\n

Read Also: What are the Generally Accepted Accounting Principles: All You Need<\/a><\/p>\n\n\n\n

Income Statements: Single-Step vs. Multi-Step<\/span><\/h2>\n\n\n\n

A single-step income statement accounts for a company’s net income in a straightforward manner, but a multi-step income statement accounts for net income in three steps, separating operational from non-operational revenues and expenses.<\/p>\n\n\n\n

Single-Step Income Statements<\/span><\/h3>\n\n\n\n