Barbara is a financial writer for Tipalti and other successful B2B businesses, including SaaS and financial companies. She is a former CFO for fast-growing tech companies with Deloitte audit experience. When she’s not writing, Barbara likes to research public companies and play Pickleball, Texas Hold ‘em poker, bridge, and Mah Jongg. This information helps you make more informed decisions based on how profitable your product or service lines are.

Typically, larger companies will use the multi-step income statement as it provides more valuable details to its many investors and lenders. However, since the items depend on the sector or the type of company, industry, and the accounting rules followed in the organization, peer comparison may take some work. An example of a single step income statement is Dana Incorporated’s Consolidated Statement of Operations for the calendar years ended December 31, 2021, 2020, and 2019. It’s available as a 10-K company filing in the SEC’s EDGAR database dated February 23, 2022. Many companies prepare quarterly and annual income statements based on the calendar. Others use a fiscal year with start and end dates that don’t align with the calendar.

Operating Head – Gross Profit

The income statement doesn’t show Gross profit, separate and calculate Total Operating expenses, or calculate Total Operating income. After all sources of income and expenses are tallied, and taxes are deducted, the result is net income or net loss. Net income also is sometimes referred to as net profit, earnings, or the bottom line.

The multi-step income statement allows for identifying trends and insights through the detailed data provided, enabling stakeholders to understand the dynamics of the company’s financial performance over time. This understanding is pivotal in making informed decisions, formulating effective business strategies, and addressing any underlying financial performance issues. By analyzing trends and comparing these measures over different periods, stakeholders can identify potential areas for improvement and make informed strategic decisions. Operating income, another critical element, reflects the profit generated from a company’s core business operations.

Such transactions are what you observe under Sales Return and Allowances account. Fundamentally, the basic premise of either presentation format is conceptually the same, granted the outcome of either method is to arrive at net income. Lastly, you can see the non-operating and other section being subtracted to compute the net income.

In financial accounting, the two types of income statements are the standard single-step income statement and the multiple-step income statement. The income statement shows the total revenue attributable to the primary activities of the business, excluding revenues from non-merchandise-related sales. In the bottom section of your income statement, below your operating activities, create a section for your non-operating activities. Add your revenues and expenses from non-operating activities, including interest and the sale or purchase of investments. By adding the operating income and non-operating income, you should be able to compute the company’s bottom line after deducting the income tax expense.

• Investors and creditors want to know how efficiently the retailer sells its merchandise without diluting the numbers with other gains and losses from non-merchandise related sales.
• A simple multiple step income statement separates income, expenses, gains, and losses into two meaningful sub-categories called operating and non-operating.
• If a company’s operations are strong, it will almost always show a profit at the bottom line, but not all companies with a profitable bottom line have strong operations.
• For instance, management might shift expenses out of cost of goods sold and into operations to artificially improve their margins.
• Therefore, the net income factors in non-operating items such as interest expense, other non-operating costs such as non-recurring losses from inventory write-downs, and income taxes paid to the government.
• In a multi-step income statement, you calculate your gross profit, operating profit, and net profit.

Operating Head – Selling and Admin Expenses

The calculation of the first section shows the gross profit of business by deducting the cost of goods sold (COGS) from the total sales. It is an important figure for the creditors, investors, and internal management as it depicts how profitable a company is at selling the goods or making the products. Thus, it provides a complete breakdown of the revenue and expense list in the income statement.

Complete the operating expenses and revenue section

It notes all company operating expenses in two categories that are Selling and Administrative. Investors and creditors can evaluate how well a company performs its main functions separate from any other activities the business is involved in. Investors and creditors want to know how efficiently the retailer sells its merchandise without diluting the numbers with other gains and losses from non-merchandise related sales.

Net Profit

For instance, interest expense is a non-operating cost since the item pertains to the financing activities of a company rather than any of its specific operating activities. The net income metric is inclusive of all costs – operating and non-operating costs – in contrast to the operating profit metric, which only accounts for operating costs (i.e. COGS and Opex). A Multi-Step Income Statement is a statement that differentiates among the incomes, expenditures, profits, and losses into two important sub-categories that are known as operating items and non-operating items. There may be a couple of entries or many, depending on the size and complexity of the business. You should consult your own professional advisors for advice directly relating to your business or before taking action in relation to any of the content provided.

It provides a more detailed breakdown of expenses than a single-step income statement and uses a variety of equations to determine the net income of a business. The income statement format is similar for both, but multi-step income statements contain more information about your company’s financials. Small businesses use them if they need a more detailed breakdown of their financial statements. For example, if you want deeper insight into your income, expenses and profitability. A multi-step income statement is a financial statement that provides a detailed breakdown of a company’s revenues, expenses, and profits over a specific period, typically dividing the calculation into multiple steps. This format includes several sections and subtotals, allowing for a more comprehensive company performance analysis than a single-step income statement.

Preparing the multi-step income statement is beneficial for medium to big corporations to keep track of their income. As the revenue and expenses are segregated into operating and non-operating accounts, it provides greater insight into the company’s financial performance. Right after computing the total operating income, the other revenues and expenses section is the revenue and expense incurred from non-operating activities. In a true single-step income statement with no subtotals, line items for net revenues and costs and expenses are listed with a single total for Net income (loss). Businesses may include a subtotal for Total expenses in a single-step income statement.

Gross Profit

The single-step income statement skips the calculation of gross profit and operating profit, instead focusing on the bottom line– net income. The multi-step income statement calculates gross profit, operating profit, and net income. The format of the multi-step income statement contains Selling and Admin Expenses as the second section.

• At the same time, you can see where money leaves your business so you know where your highest costs are.
• The final step in creating a multi-step income statement is calculating net income.
• So, we get various details of the advantage of a multi-step income statement from the above points.
• You can easily see how money flows into your business, so you know which areas are most profitable.
• Others use a fiscal year with start and end dates that don’t align with the calendar.
• To understand a detailed multi step income statement for financial accounting, consider its formulas for income statement sections.

As can be seen 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. Basically the bulk of the net income is actually coming multi step income statement example from other income of 24,000 with may not be sustainable. On the other hand, a multi-step income statement follows a three-step process to calculate the net income, and it segregates operating incomes and expenses from the non-operating incomes. It separates revenues and expenses from activities that are directly related to the business operations from activities that are not directly tied to the operations. The multi-step income statement categorizes operating and non-operating incomes and expenses. The users will know the profit earned from the primary activities of buying and selling goods and how it differs from the non-operating activities.

It provides insights into the business’s ability to generate profits from its primary activities, thus serving as a key metric for assessing operational efficiency. The advantages of a multi-step income statement over a single-step version are evident in its ability to present a more comprehensive overview of a company’s financial performance. It enables users to identify the specific areas contributing to the profit or loss, thus facilitating a more informed analysis. The components of the multi-step income statement comprise three equations that calculate a profit metric that each measures a unique attribute of the underlying company’s financial performance. Other income and expenses like interest, lawsuit settlements, extraordinary items, and gains or losses from investments are also listed in this section. Unlike the operating section, the non-operating section is not split into subcategories.

The net income line is calculated as Operating income less net Non-operating expenses. The primary difference between single-step and multi-step income statements lies in their complexity and the level of detail they provide. A multi-step income statement divides a company’s revenue and expenses into operating and non-operating subtotals. Instead of just having the revenue, expenses, and net income like a traditional income statement, a multi-step income statement has a more detailed breakdown with components such as gross profit and operating profit. The selling and administrative expense sections are added together to compute the total operating expenses. This total expense line is subtracted from the gross profit computed in the first section to arrive at the company’s operating income.