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.

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, yearly.
  • However, in a very rare occurrence, the company can define a reporting period based on project duration
  • 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 operations80,000
Interest  revenue1,200
Profit on sale of assets4,500
Total85,700
Expenses & Losses 
Cost of goods sold60,000
Commission700
Office supplies expenses1,500
Advertisement expense2,000
Loss from sale of investment1,000
Interest2,500
Total67,700
Net Income18,000

Multi-Step Income Statement

A Multi-Step Income Statement is a detailed statement reflecting profits or losses from the operating and non-operating activities of an organization 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$
Sales80,000
Cost of goods sold60,000
Gross Profit20,000
Operating expense 
Administrative expenses 
Office supplies expense1,500
Selling expenses 
Advertisement expense2,000
Commission700
Total operating expense4,200
Operating income15,800
Non-operating items 
Interest revenue1,200
Profit on sale of assets4,500
Loss from sale of investment-1,000
Interest-2,500
Total non-operating items2,200
Net Income18,000
multi step income statement

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

Multi-step income statement are generally used by large and complex organizations. Companies having different sources of revenue should create multi-step income statement. This would include large manufacturing concerns and retailers selling a wide variety of products. Multi-step income statement is also maintained by public companies for disclosure requirement 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, 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.
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Sanjay Borad

Sanjay Bulaki Borad

Sanjay Borad is the founder & CEO of eFinanceManagement. He is passionate about keeping and making things simple and easy. Running this blog since 2009 and trying to explain "Financial Management Concepts in Layman's Terms".

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