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

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

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.