Single-Step vs Multi-Step Income Statement

We’re firm believers in the Golden Rule, which is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team. Also known as Gross Margin, the Gross Profit measures the company’s profitability after deducting the cost of good sold. In the revenue section, you should be able to view the company’s sales and net sales. Sales, Salaries, Rent, Interest Revenue etc, are all stored in your chart of accounts. It is important to set the chart of accounts correctly to get the right report.

Also, its compulsory for publicly traded companies to prepare the multi-step income statements based on the government’s requirements for statutory compliance. By adding the operating income and non-operating income, you should be able to compute the company’s bottom line after deducting the income tax expense. Unlike the single-step income statement that uses only one accounting equation to compute the net profit, businesses will need to use multiple accounting equations to derive at the bottom line. A multi-step income statement reports much of the same general information included in a single-step income statement, but it uses multiple equations to determine the net income, or profit, of the company.

As stated in the previous section, using a multi-step income statement is beneficial when trying to attract investors or apply for credit. Accountants can use the contribution margin to analyze the company’s break even point and its margin of safety. Margin of safety is the amount of a company’s profit after subtracting its break-even point. Contribution margin is also used internally to analyze or forecast product profitability for new product feasibility, pricing, and decisions on accepting orders with non-standard pricing.

Add Non-Operating Revenues and Expenses

Together, these sections provide a detailed overview of a company’s financial performance. These are advantages or pros compared to the single-step income statement format. The final step in creating a multi-step income statement is calculating net income.

• If a tree hit the building and the insurance company paid out a small settlement, the income would not be reported with total sales.
• The first section computes the gross profit of the business by subtracting the cost of goods sold from the total sales.
• The required information has been provided to us in the form of the adjusted trial balance.
• A simple multiple step income statement separates income, expenses, gains, and losses into two meaningful sub-categories called operating and non-operating.

We subtract the cost of goods sold from the net sales to arrive at the gross profit number. Each company will have to pay income tax to the government depending on the tier’s of income that they fall into. The sales account is the total amount of sales derived from selling the company’s goods and services. If your operating items under performed and your non-operating items overachieved, being able to see the two can become a drawback. With the single-step layout, details are left 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.

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. Small businesses with a simple operating structure, including sole-proprietorships and partnerships, can choose between creating single-step or multi-step income statements. 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). Businesses may include a subtotal for Total expenses in a single-step income statement.

Multi-step income statement definition

A multi-step income statement is an alternative to the single-step income statement. This includes the costs of goods sold, advertising expenses, administrative expenses, and employee salaries. Administrative expenses include things such as rent and office equipment and supplies. We’re now ready to calculate operating income by subtracting the remaining operating expenses from gross profit.

A multi-step statement is an income statement prepared to report a company’s sales and revenue, expenses and overall profit or loss for any given period. It is a detailed report unlike the single-step income statement and utilizes multiple accounting equations to calculate net profit for a business. For example, they include several income and expense categories, they present net income as a separate line item, and they often include a reconciliation of net income to cash flow from operating activities.

Thus, statement users can see how much expense is incurred in selling the product and how much in administering the business. Statement users can also make comparisons with other years’ data for the same business and with other businesses. Nonoperating revenues and expenses appear at the bottom of the income statement because they are less significant in assessing the profitability of the business.

The first step in preparing the statement is choosing an accounting period to report on. The law states that publicly traded companies prepare financial statements on a quarterly and annual basis. A multi-step income statement is a financial statement that presents a company’s revenue, expenses, and net income in a more detailed and comprehensive manner than a single-step income statement. The main purpose of preparing a multi-step income statement is to provide insights into a company’s overall financial performance. The four measures of income on the multi-step income statement include gross profit, operating income, pretax income, and post-tax income.

All publicly-traded companies in the U.S. must adhere to Generally Accepted Accounting Principles (GAAP), which are accounting standards issued by the Financial Accounting Standards Board (FASB). Many private companies elect to follow GAAP, even though they aren’t legally obligated to do so. In any case, GAAP gives companies the option of issuing either single-step or multiple-step income statements, depending on how they’re structured.

What’s a Multi-Step Income Statement?

This straightforward document merely conveys a company’s revenue, expenses, and bottom-line net income. All revenues and gains are totaled at the top of the statement, while all expenses and losses are totaled at the bottom. This simplified approach makes record-keeping easier for both the accountants who prepare the statements and the investors who read them. Shareholders need only focus on the net income figure, to gauge a company’s overall vitality.

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. At the bottom of the income statement, under the operating activities, is where you put the section for non-operating activities. Include the income and expenses from these non-operating activities, such as interest on and the purchase or sale of investments. Each of these relationships is important because of the way it relates to an overall measure of business profitability. However, because of large sales commissions and delivery expenses, the owner(s) may realize only a very small amount of the gross margin as profit.

What Businesses Use Multi-Step Income Statements?

For instance, management might shift expenses out of cost of goods sold and into operations to artificially improve their margins. It’s always important to view comparative financial statements over time, so you can see trends and possibly catch misleading placement of expenses. The selling and administrative expense sections are what are payroll taxes 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. The major headings on a multi-step income statement are revenue, gross profit, operating income, non-operating income, and net income.

The next step is to subtract the total of your operating expenses from your gross profit in order to arrive at operating income. Operating income measures the amount of income from operations excluding all non-operating income and expenses. The multi-step income statement helps users in analyzing the performance of the business. Investors, lenders, and other key stakeholders monitor the gross margin of the business, which is calculated as a percentage of net sales. The gross margin is then compared to the company’s past gross margins and other comparable entities’ gross margins to determine how efficiently the company is performing.

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.

• It can be helpful to work through a multi-step income statement example in order to understand multi-step income.
• The easiest income statement to prepare, the single-step income statement provides an at-a-glance look at revenues and expenses, which most smaller businesses will find sufficient.
• 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.
• One of the most important advantages of single-stepping when creating an income statement is that this single-step format is very easy to prepare.

At the top section of this income statement, to compute the gross margin, subtract the cost of good from the net sales. For instance, the gross margin of XYZ Company is a total of $340,000 ($490,000 – $150,000). The line items could be misleading if management tries to move expenses from cost of goods sold into operating expenses. Given its higher level of information content, the multi-step format is usually preferred over the single step format (which does not incorporate sub-totals and so can be more difficult to read). The important subtotals on the multiple-step income statement are convenient for the reader/user of the income statement.

The multi-step income statement is the type of income statement you are likely to see most often. It is formatted with operating revenues and operating expenses separate from the non-operating revenues, non operating expenses, gains, and losses. A multi step income statement is more detailed than a simple single step income statement. It provides insights that financial statement users need when reading a profit and loss statement prepared using GAAP accounting standards.

If you operate as a freelancer, consultant, or sole proprietor, then you should be able to get by with a single-step income statement. 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. 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. To compute the operating income, you can follow the accounting equation stated above.