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

At the top of the statement all the revenues are shown together and totalled. Below the revenues, all the expenses are shown together and totalled. In a single step the total expenses are deducted from the total revenue to give the net income, which is shown at the bottom of the single step income statement

Single Step Income Statement
Net sales 100,000
Other income 20,000
Revenue 120,000
Cost of sales 40,000
Research and development 35,000
Selling, general and administrative 20,000
Operating expenses 95,000
Net Income (Step 1) 25,000

 

Multi Step Income Statement Example

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 margin
Step 2: Gross margin – Operating expenses = Operating income
Step 3: Operating income + Other income = Net income

Multi Step Income Statement
Net sales 100,000
Cost of sales 40,000
Gross margin (Step 1) 60,000
Research and development 35,000
Selling, general and administrative 20,000
Operating expenses 55,000
Operating income (Step 2) 5,000
Other income 20,000
Net Income (Step 3) 25,000

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

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 margin 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 20,000 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.

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 6th, 2016Team

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