Multi-Step Income Statement for Small Businesses

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. The multi-step income statement details the gains or losses of a business, in a specific reporting period.

Multi-Step Income Statement Example

The other core financial statements are the balance sheet and cash flow statement. Multi-step income statement is one of the two most commonly used income statement formats, the other being the single-step income statement. Multi-step income statement involves more than one subtraction to arrive at net income and it provides more information than a single-step income statement. The most important of which are the gross profit and the operating profit figures. Operating income, another critical element, reflects the profit generated from a company’s core business operations. It provides insights into the business’s ability to generate profits from its primary activities, thus serving as a key metric for assessing operational efficiency.

So, we get various details of the advantage of a multi-step income statement from the above points. IDC MarketScape vendor analysis model is designed to provide an overview of the competitive fitness of technology and suppliers in a given market. The research methodology utilizes a rigorous scoring methodology based on both qualitative and quantitative criteria that results in a single graphical illustration of each supplier’s position within a given market. The Capabilities score measures supplier product, go-to-market and business execution in the short-term. The Strategy score measures alignment of supplier strategies with customer requirements in a 3-5-year timeframe. Barbara is a financial writer for Tipalti and other successful B2B businesses, including SaaS and financial companies.

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. 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. Management accountants use another type of multi step income statement for internal use that separates fixed and variable costs to compute the contribution margin. Another application for a multiple-step income statement is dividing costs into direct and indirect costs for cost accounting by management accountants.

The header of your multi-step income statement conveys important information to readers. It states the name of your company, it identifies the document as an income statement and it defines the reporting period covered by the document. Yet, from a practical perspective, the insights that can be obtained from the multi-step income statement are ultimately far more insightful to understand and analyze the financial performance of a company.

Format

Present the multi step income statement in a clear and organized format, typically with revenue sections at the top followed by expense sections. Include subtotals for gross profit, operating income, and net income to provide clarity on the financial performance at different stages of operations. As already highlighted, operating activities are those directly related to the core business operations, such as sales revenue and cost of goods sold. Non-operating activities include interest income, gains/losses from investments, and other incidental revenue or expenses. The multi-step income statement lists down all these items in different sections or categories, which makes it convenient for the users to gain an understanding of core business operations in a better way.

If a tree hit the building and the insurance company paid out a small settlement, the income would not be reported with total sales. It would be reported in the non-operating and other section because it doesn’t have anything to do with sales. In a true single-step income statement with no subtotals, line items for net revenues and costs and expenses are listed with a single total for Net income (loss).

#2 – Operating Head – Selling and Admin Expenses

As the revenue and expenses are segregated into operating and non-operating accounts, it provides greater insight into the company’s financial performance. Other income and expenses like interest, lawsuit settlements, extraordinary items, and gains or losses from investments are also listed in this section. Unlike the operating section, the non-operating section is not split into subcategories. By separating operating and non-operating expenses, the multi-step income statement gives you a detailed breakdown of your net profit. You can easily see how money flows into your business, so you know which areas are most profitable.

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Net Income can be calculated by adding or subtracting the various non-operating expenses from operating profit. On this multi-step income statement, there is interest expense, interest income, a non-operating gain, and income tax expense. You should add the interest income and non-operating gain and subtract the interest expense and income tax expense from operating profit. The format of the multi-step income statement contains Non-Operating Head as the third section. The non-operating and the other head list all kinds of business incomes and expenses unrelated to a business’s principal activities.

This approach allows for a more accurate analysis of the company’s profitability and helps identify specific areas where improvements can be made. By creating a multi-step income statement, companies can better understand their revenue streams, cost of goods sold, and operating expenses, leading to more informed decision-making and strategic planning. Overall, using the multi-step income statement benefits companies seeking a more detailed and comprehensive overview of their financial performance. The gain may be a one-time item such as a winning lawsuit or insurance settlement. The gain does not relate to the company’s core business activities, so it is listed in the non-operating section of the income statement.

• The multi-step income statement template contains Gross Profit as the first section.
• A multi-step income statement is an income statement that segregates total revenue and expenses into operating and non-operating heads.
• An example of a multi step income statement is Arrow Electronics, Inc.’s Consolidated Statements of Operations for the calendar years ended December 31, 2021, 2020, and 2019.
• On this multi-step income statement, there is interest expense, interest income, a non-operating gain, and income tax expense.
• Lastly, you can see the non-operating and other section being subtracted to compute the net income.
• If you’re new to preparing income statements or unsure how to structure it, we have a pre-made free income statement template that you can use to simplify the process.

Investors and creditors want to know how efficiently the retailer sells its merchandise without diluting the numbers with other gains and losses from non-merchandise related sales. The income statement shows the total revenue attributable to the primary activities of the business, excluding revenues from non-merchandise-related sales. Also, a non-operating income can be an insurance compensation paid by an insurance firm to the company’s account as settlement proceeds for damage or loss of a company’s asset.

What Businesses Use Multi-Step Income Statements?

It’s important to note that the accuracy and adequacy of the multi-step income statement directly influence the understanding of a company’s financial performance. A meticulously prepared statement provides stakeholders with a detailed breakdown of the company’s financial activities and aids in assessing its operational efficiency and multi-step income statement example profitability. Overcoming these challenges is crucial as the accurate preparation of the income statement significantly impacts the financial reporting, influencing the decisions made by the stakeholders and potential investors. Gather all the necessary financial information for the reporting period, which could be a quarter or a year. Users can gain insights into how a company’s primary business activities generate revenue and affect costs compared to the performance of the non-primary business activities. A multi-step income statement is an alternative to the single-step income statement.

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A multi step income statement is important because it provides the company, investors, lenders, and other stakeholders deep insight into a company’s financial performance during a period of time and its operating trends. These are advantages or pros compared to the single-step income statement format. The Gross profit part of a multi step income statement shows Net Revenues (Net Sales and Net Service Revenues) minus Cost of goods sold. The Operating income part lists operating expenses and subtracts them from Gross profit to equal Operating income.

• Operating income, another critical element, reflects the profit generated from a company’s core business operations.
• Each company will have to pay income tax to the government depending on the tier’s of income that they fall into.
• In contrast to a multi-step income statement, the Dana Incorporated income statement is single-step mainly.
• The multi-step income statement is a method of presenting the financial results of a company by segmenting the revenue, costs, and expenses into distinct sections.
• It’s always important to view comparative financial statements over time, so you can see trends and possibly catch misleading placement of expenses.

For instance, a retailer is not into the insurance business, and a car hits their store. The insurance company paid an amount out of the settlement so that proceeds received from the insurance company will not be considered in total sales; rather, it will be a non-operating income. A multi step income statement is often used to make GAAP financial statements. This financial report format can be generated automatically by your business accounting software or ERP system. After review and approval by financial management, it can be distributed to authorized internal users. Finally, find the net income by adding the operating income to the non-operating income and then deducting the non-operating expenses.

Operating income captures the performance of the company in terms of its primary business activities. A phone manufacturer that has lots of products, a complicated organizational structure and various sources of income, will typically use a multi step income statement with revenues divided by product categories and regions. They’ll also detail the operating expenses, which include the cost of sales, R&D, and marketing expenses to achieve more visibility.