Multi-Step Income Statement: Meaning, Formula, and Examples

When used in conjunction with the other financial statements, an income statement can give you a clear view of your cash flow. The document will clearly indicate it’s an income statement rather than another financial statement, such as a balance sheet or cash flow statement. The single-step income statement is the simplest income statement format, calculating revenue totals and subtracting expenses to arrive at net income. Also, its compulsory for publicly traded companies to prepare the multi-step income statements based on the government’s requirements for statutory compliance.

It can be helpful to work through a multi-step income statement example in order to understand multi-step income. The following will use theoretical numbers to explain the details of preparing a multi-step income statement. An insurance payout multi step income statement example paid to the company’s account as settlement proceeds for damage or loss of a company’s asset can also be considered non-operating income. It contains all business earnings and costs unrelated to the company’s primary and core activities.

Example of a multi-step income statement

A single-step income statement accounts for a business’s net income straightforwardly. Still, a multi-step income statement accounts for net income in three steps, separating operational from non-operational revenues and costs. The final step for preparing your multi-step income statement is determining your net income. This is done by subtracting other revenue and expense totals from your operating 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. Right after computing the total operating income, the other revenues and expenses section is the revenue and expense incurred from non-operating activities.

The multi-step income statement categorizes operating and non-operating incomes and expenses. The users will know the profit earned from the primary activities of buying and selling goods and how it differs from the non-operating activities. 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 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.

Step 8. Calculate other revenue and expenses

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. Add the final calculation as a line item at the bottom of your operating activities section, titled Net Operating Income or Income from Operations.

A successful bottom line indicates that a company’s operations are solid, although not all organizations with a profitable bottom line have good operations. Administrative expenses are not directly tied to the sale of goods, such office staff salaries, rent fees, etc. Also known as Gross Margin, the Gross Profit measures the company’s profitability after deducting the cost of good sold. In any business, customers can return the goods as the product might be broken, faulty, or may malfunction. Such transactions are what you observe under Sales Return and Allowances account.