Multi-Step Income Statement

As the name indicates, a multi-step income statement shows multiple steps in Income Statement. To understand this concept in a better way, we have to first understand what is an income statement and a single-step income statement. Let us see more about Multi-Step Income Statement and Single-Step Income Statement.

What is an Income Statement?

• It is a Financial statement. And it reflects profit earned during a reporting period.
• Moreover, the reporting period could be monthly, quarterly, or yearly.
• However, the company can define a reporting period based on project duration in a very rare occurrence.
• The statement is divided into top and bottom numbers
  • The top number indicates the total revenue accrued during the period.
  • Whereas the bottom number is the profit earned or accrued.
• And, Profit = Revenue – Expenses

Single Step Income Statement

• It is a direct, simple statement and has no categories. It is divided into two parts only, i.e., income and expenses.
• Advantages of Single Step income statement
  • Can be prepared quickly
  • Easy to Read
  • Fast to comprehend
• From the above discussions, we can conclude
  • The single-step method is simple, and
  • It is an excellent tool for overall profitability analysis

Example

Particulars	$
Revenues & Gains
Revenue from operations	80,000
Interest  revenue	1,200
Profit on sale of assets	4,500
Total	85,700
Expenses & Losses
Cost of goods sold	60,000
Commission	700
Office supplies expenses	1,500
Advertisement expense	2,000
Loss from sale of investment	1,000
Interest	2,500
Total	67,700
Net Income	18,000

Multi-Step Income Statement

A Multi-Step Income Statement is a detailed statement reflecting profits or losses from an organization’s operating and non-operating activities for a specific reporting period. It differentiates the operating and non-operating incomes and expenses, which ultimately shows earnings from main business activities as compared to non-essential activities.

• As discussed earlier, a multi-step income statement categorizes the Income Statement.
  • The first item in FS is Revenue: The revenue is classified into two
    • Operating Revenue = Related to the Business, and
    • Non-operating Revenue = Anything that does not pertain to the main business activity
    • Example: Interest on Fixed Deposit
  • The next item is expenses: The expenses are classified into
    • Operational Expenses:
      • These are further classified either based on cost center or department
      • Moreover, anything that cannot be segregated should be treated as other costs
• In this method, we use different formulae to arrive at the profitability

Advantages

• Transparency
• Detail Oriented

Challenges

• Time-consuming for preparation
• Overwhelming

Example

Particulars	$
Sales	80,000
Cost of goods sold	60,000
Gross Profit	20,000
Operating expense
Administrative expenses
Office supplies expense	1,500
Selling expenses
Advertisement expense	2,000
Commission	700
Total operating expense	4,200
Operating income	15,800
Non-operating items
Interest revenue	1,200
Profit on sale of assets	4,500
Loss from sale of investment	-1,000
Interest	-2,500
Total non-operating items	2,200
Net Income	18,000

Formats of Reporting

• The main purpose of any income statement is to show the profit
• But a single step arrives at a profit with basic information
• Whereas a multi-step approach groups the information in a better format.

Formulas

Formulas for calculating incomes in a multi-step income statement are:

Gross Profit = Net Sales – Cost of Goods Sold

Operating income = Gross Profit – Operating Expenses

Net Income = Operating income + Non-Operating items

Application of Multi-Step Income Statement

Large and complex organizations generally use multi-step income statements. Companies having different sources of revenue should create multi-step income statements. This would include large manufacturing concerns and retailers selling a wide variety of products. Public companies also maintain multi-step income statements for disclosure requirements under laws.

Which is better?

• Firstly, the format depends upon the purpose of the presentation of Financial Statements. 
• Secondly, it depends upon the audience.
• Thirdly, for statutory reporting, the formats are preset. However, for management reporting,
  • If the management wishes to go into detail, a Multi-step Income statement is beneficial.
  • Otherwise, we can go with the single-step income statement
  • If accurate, reliable data is available, the multi-step approach is advisable,
  • Sometimes time and gathering data could be a constraint, then a single-step approach is more advisable.