This would include cost of goods sold, as well as costs such as advertising expenses, salaries and administrative expenses, including office supplies and rent. Companies with many different sources of revenue should create a multi-step income statement. This would include large manufacturing businesses as well as large, complex retailers.
- It allows the user to see the impact of the company’s day-to-day activities separate from its investing and other non-operating activities.
- Add the final number as a line item under the cost of goods sold and title it Gross Profit.
- Although the multi-step income statement comes with greater detail, it is not perfect.
- The gross margin computes the amount of money the company profits from the sales of its merchandise.
Being able to see the performance in operating items and non-operating items is a benefit if your operating items performed well. With the single-step layout, details are left purchase assets in accounting out of the presentation and calculation of net income. The layout of the multi-step will allow the user to see the performance of the operating and non-operating components.
Someone like a bank would want to see more detail about the business to determine your financial performance and stability. Finally, when arriving at net income, you are able to see what the business’s core activities produced and what the effect of non-core activities had net income. Unlike a single-step format, multi-step formats don’t only focus on net income but offer an additional level of detail by calculating two more income-related figures. Hence, the potential investors and creditors will gain better clarity of your company’s financial footing, which helps boost your chances of getting funding and bank loans. For instance, if your business is charged with 10% of tax expense from a total of $60,000 of net income, thus, your business will have to bear $6,000 of tax expense. You can also include taxes in this section, or if you’re looking to create EBIT (earnings before income taxes), you can create a separate section for taxes.
Single-Step vs. Multiple-Step Income Statements: What’s the Difference?
For example, by deducting COGS from operating revenues, you can determine by what amount sales revenues exceed the COGS. If this margin, called gross margin, is lower than desired, a company may need to increase its selling prices and/or decrease its COGS. The classified income statement subdivides operating expenses into selling and administrative expenses. Thus, statement users can see how much expense is incurred in selling the product and how much in administering the business.
Shareholders need only focus on the net income figure, to gauge a company’s overall vitality. A multi-step income statement divides a company’s revenue and expenses into operating and non-operating subtotals. Instead of just having the revenue, expenses, and net income like a traditional income statement, a multi-step income statement has a more detailed breakdown with components such as gross profit and operating profit.
Components of a Multi-Step Income Statement
The selling and administrative expense sections are added together to compute the total operating expenses. This total expense line is subtracted from the gross profit computed in the first section to arrive at the company’s operating income. Single-step income statements report the revenue, expenses, and profit (or loss) of a business during a specific period. One of the biggest differences between a single-step income statement and a multi-step income statement is the ability to calculate gross profit.
As stated in the previous section, using a multi-step income statement is beneficial when trying to attract investors or apply for credit. On the multi-step income statement, the non-operating sections sits below the operating section. The amount of detail provided in multi-step formats can be a drawback as it’s a time-consuming and more complex way of preparing an income statement compared to using a single-step format. Moving forward, you should be able to compute the company’s Net Income before tax by adding the sum of operating income with non-operating income.
It would be reported in the non-operating and other section because it doesn’t have anything to do with sales. Given the gross profit of Apple for each period, the next step is to subtract operating expenses to determine the company’s operating profit in each fiscal year. Creating a multi-step income statement is a labor-intensive process for a company. Accounting teams need to be robust to correctly account for the line items and classifications of revenues and expenses. The separation of operating items and non-operating items make it easy to see the performance of the core business activities (operating) and what effect non-core activities had of net income (non-operating).
Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team. Mary Girsch-Bock is the expert on accounting software and payroll software for The Ascent. My Accounting Course is a world-class educational resource developed by experts to simplify accounting, finance, & investment analysis topics, so students and professionals can learn and propel their careers. Keep an eye out in the financial footnotes of the statement and annual report, as any change like this would be disclosed there.
Single-step income statements aren’t very helpful for financial decisions that require more in-depth information about a business’s financial health than simply looking at its net income. When assessing a business’s financial performance, you’ll need more than just a single-step income statement. 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. 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. A multiple-step income statement presents two important subtotals before arriving at a company’s net income. For a company that sells goods (merchandise, products) the first subtotal is the amount of gross profit.
What is 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.
Choosing a Single-Step vs. Multi-Step Income Statement
A multi-step income statement is an income statement that segregates total revenue and expenses into operating and non-operating heads. It offers an in-depth analysis of the business’s financial performance in a specific reporting period. It lists items in different categories to make it convenient for users of the income statement to better understand the core operations of the business. Investors and lenders can use a multi-step income statement to analyze how effectively a company’s core business activities are performing. It allows the user to see the impact of the company’s day-to-day activities separate from its investing and other non-operating activities. Finance and accounting professionals will also use the multi-step income statement to compare between companies, as it allows for comparisons for the gross profit margin or the operating profit margin.
This is a key figure for investors, creditors, and internal management because it shows how profitable the company is at selling its goods or making its products. As discussed above, we saw how multi-step income statements are useful for investors and creditors to get a detailed insight into a company’s financial performance and its pros and cons. The attached example also helped us understand the different components used in such a statement. An example of the multi-step income statement is attached as an Excel file where we start with the sales turnover of $200,000 and arrive at a gross profit of $150,000 by deducting the cost of gold sold off the value of $50,000.
Direct costs refer to expenses for a specific item, such as a product, service, or project. Contrarily, indirect costs are generalized expenses that go towards a company’s broader infrastructure, and therefore cannot be assigned to the cost of a specific object. Examples of indirect costs include salaries, marketing efforts, research and development, accounting expenses, legal fees, utilities, phone service, and rent. The operating section is subdivided into two main sections that list the primary business income and expenses. The first section computes the gross profit of the business by subtracting the cost of goods sold from the total sales.