One day, a beautiful day, I came to work as usual. Unfortunately, our company’s accountant was off work that day because of her sickness. I still remember my boss challenged me, a staff on probation, with a task beyond my major: preparing a Multi-step Income Statement for my company.
At that time, I was sweating buckets, struggling with my assigned task full of figures and data. Thus, I rushed to search the internet, but unfortunately, I got lost in various sources of information. Consequently, it took me up to a whole week to accomplish the task.
But now, you don’t need to spend hours on your tasks as I used to. I’m here to help you with a concise guide on Multi-step Income Statement from my hard-learnt lessons. If you merely want to discover what benefits it provides for businesses, this article is for you.
What is a Multi-step Income Statement?
Firstly, you need to grasp an overview of a Multi-step Income Statement. To make it easier, I would like to expound on the definition of an income statement first:
An income statement, also known as a profit-and-loss statement, is:
- One of the three important components of a financial statement (along with balance sheet and statement of cash flows).
- A report on the revenue and expenses of a company over a certain period.
- An indication of how a company operates its business, how efficient its management is, how good its financial health is, etc.
Next, let’s get into what a Multiple-step Income Statement is. In fact, a Multi-step Income Statement is an income statement that divides total revenue and expenses into operating and non-operating ones.
- Operating revenue: sales of goods, services, etc.
- Operating expenses: costs of advertising, selling, commission, administration, office supplies, etc.
- Non-operating revenue: interest income, dividends, etc. (earnings outside a company’s core operation)
- Non-operating expenses: obsolete inventory charges, restructuring expenditure, etc (expenses outside a company’s core operation).
How does a Multiple-step Income Statement differ from a Single-step one?
Now, let’s draw a comparison between a Single-step Income Statement and a Multi-step Income Statement to see their strengths and weaknesses:
|Single-step Income Statement||Multi-step Income Statement|
|+ Using total revenue (plus gains) and total expenses (plus losses) to calculate Net Income.|
+ Only 1 single step to find net income: Net Income = Revenue + Gains – Expenses + Losses
+ Easier to prepare and more straightforward.
+ Appropriate for small-scale businesses.
|+ Classifying revenue and expenses into operating and non-operating sections.|
+ 3 steps to find net incomes: Gross Profit → Operating Income → Net Income
+ More detailed and in-depth.
+ Suitable for large-scale businesses.
As seen above, a single-step income statement seems easier to prepare, it doesn’t give us many insights. Meanwhile, a Multiple-step Income Statement does. For example, they include Gross Profit, the essential metric to show the efficiency of using labor or equipment to generate revenue and gains. Therefore, the Multi-step Income Statement is a preferred option for large-scale businesses and more detailed financial analysis.
How to prepare a Multiple-step Income Statement?
Even though it’s called a Multi-step Income Statement, there are only 3 steps with 3 different accounting formulas. You can use them to arrive at the Net Income – the expected final result.
- Firstly, you need to find out the Gross Profit as follows:
Formula #1: GROSS PROFIT = NET SALES – COST OF GOODS SOLD
- Secondly, after having the Gross Profit, your job is to find out Operating Income by subtracting Operating Expenses from the Gross Profit:
Formula #2: OPERATING INCOME = GROSS PROFIT – OPERATING EXPENSES
- Finally, from the Operating Income you have just found, adjust Non-operating Items (non-operating revenue, expenses, losses, and gains) to it, and you will have the final result, the Net Income.
Formula #3: NET INCOME = OPERATING INCOME +/- NON-OPERATING ITEMS
As you can see, with only 3 steps to calculate Net Income, preparing a Multi-step Income Statement now becomes easier than ever!
To illustrate, let’s take a look at the example below:
Step 1: Find out the Gross Profit:
Gross Profit = Sales – Cost of Goods Sold
= $1000,000 – $300,000
Step 2: Find out the Operating Income:
Operating Income = Gross Profit – Operating Expenses
= $700,000 – $130,000
Step 3: Find out the Net Income:
Net Income = Operating Income + Non-operating Items
= $570,000 + $50,000
What is an advantage of using the Multiple-step Income Statement?
With the example above, I believe that you have grown more confident in preparing a Multi-step Income Statement from now on. However, if you are wondering what the advantages of a Multi-step Income Statement are, let’s look at some benefits listed as follows:
Great and concrete details
The Multi-step Income Statement divides revenue and expenses into operating and non-operating items. Hence, it provides users or readers with more detailed information on each category; so, we can arrive at more insights from the company’s business performance.
Also, it helps the users to distinguish between earnings and expenditure from the company’s main activities (like selling and buying goods) and ones from the company’s side activities (like reorganizing expenses). As a result, it facilitates the analysis and assessment of the financial performance of a company.
Presentation of Gross Profit
As mentioned above, the Multiple-step Income Statement is preferable to the single-step one thanks to the Gross Profit demonstration. Gross Profit, also known as sales profit or gross income, shows us a company’s profitability over an accounting period from the very bottom line of its business.
In addition, Gross Profit in the Multi-step Income Statement also helps us to evaluate a company on how effective it uses labor and supplies to make profits.
What type of businesses would use a Multiple-step Income Statement?
The Multiple-step Income Statement is considered a typical format commonly used by large-scale businesses like big corporations that manufactures a variety of goods. They tend to use a Multi-step Income Statement to adapt to their complexity nature as well as to easily keep track of their revenue from various sources and divide it into different items.
Regarding smaller businesses, they would prefer using a single-step income statement thanks to its simplicity. However, whenever they need to take an in-depth insight into their financial performance, especially the Gross Profit, they can switch to a Multiple-step Income Statement as a suitable alternative.
The final thought
In conclusion, preparing a Multi-step Income Statement is not nerve-racking as you may think. What’s more, the advantages a Multi-step Income Statement brings to businesses are enormous and significant. Henceforth, businesses can take it as an attractive option for financial accounting and analysis for better insights and decisions.