Multi Step Income Statement

The income statement sometimes referred to as the profit and loss statement is one of the three main financial statements of a business. To understand the multi step income statement we first need to understand what is meant by a single step income statement.

 

Single Step Income Statement

The single step income statement is called single step as there is only one step in arriving at net income

Step 1: Revenue - Expenses = Net income

Single Step Income Statement Example

Revenues including other income are shown together at the top of the income statement and totalled. Below the total revenue line all expenses including other expenses are totalled and in a single step, are deducted from the total revenue to give net income.

Single Step Income Statement
Net sales 100,000
Other income 24,000
Revenue 124,000
Cost of sales 40,000
Research and development 35,000
Selling 17,000
General and administrative 3,000
Other expenses 4,000
Expenses 99,000
Net Income (Step 1) 25,000

Other income includes income from interest, dividends, rentals, and gains on long term asset disposals; other expenses represents expenses for interest, and losses on asset disposals.

Multi Step Income Statement

The multi step income statement, sometimes referred to as a multiple step income statement, is a development of the single step income statement, and arrives at a net income figure in a series of steps, for example:

Step 1:
Revenue - Cost of sales = Gross profit
Step 2:
Gross margin - Operating expenses = Operating income
Step 3:
Operating income + Other income - Other Expenses = Net income

Multi Step Income Statement Example

The benefit of the multi step income statement is that it shows the various components that make up net income.

It should be noted that in the multi-step income statement, other income and other expenses are shown below the operating income line. As before other income represents income from interest, dividends, rents, and gains from asset disposals; other expenses represents expenses for interest, and losses on asset disposals.

Multi Step Income Statement
Net sales 100,000
Cost of sales 40,000
Gross profit (Step 1) 60,000
Research and development 35,000
Selling 17,000
General and administrative 3,000
Operating expenses 55,000
Operating income (Step 2) 5,000
Other income 24,000
Other expenses 4,000
Net Income (Step 3) 25,000

In the example above, the single step income statement shows that the business is making a net income of 25,000 and all looks well. However, the multi step income statement reveals that the business has a gross profit of 60,000 which is fine, but that operating expenses are 55,000, giving only a small operating income of 5,000 from its main trading activity. The bulk of the net income is actually coming from other income of 24,000 with may not be sustainable.

The number of steps used can vary depending on the type of business and what information is needed. For example, some businesses separate out interest, depreciation and amortization to show income before interest, tax, depreciation and amortization.

A typical real life example of a multi step income statement is shown below.

multi step income statement
Multi Step Income Statement Example

In practice, the multi step income statement usually shows much more detail of each type of category of revenue and expense than the single-step income statement.

Multi Step Income Statement November 29th, 2017Team

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