Multi-Step Income Statement Format Example Financial Statements

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.

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• The insurance company paid an amount out of the settlement so that proceeds received from the insurance company will not be considered in total sales; rather, it will be a non-operating income.
• The non-operating and the other head list all kinds of business incomes and expenses unrelated to a business’s principal activities.
• This is particularly helpful for analyzing the performance of the business.
• Barbara is a financial writer for Tipalti and other successful B2B businesses, including SaaS and financial companies.

Other income includes income from interest, dividends, rentals, and gains on long term asset disposals; other expenses represents expenses for interest, and losses on asset disposals. Big corporations tend to prepare the multi-step income statement due to the size and complexity of their businesses. These businesses, such as large manufacturing companies and giant retailers, usually have various revenue streams, and they will need to record down the income in different accounts. Preparing a multi-step income statement is a more complex process than creating a single-step report.

A single-step income statement includes just one calculation to arrive at net income. Multi-step income statements, on the other hand, use multiple equations to calculate net income. In doing so, they also calculate gross profit and operating income, which aren’t included on a single-step income statement. In comparison, a single-step income statement gives a simple record of financial activity.

One crucial component of financial reporting is the income statement which summarizes the revenues and expenses incurred over a specific period. This article will delve into the intricacies of the multi-step income statement, its key components, preparation, and its significance in analyzing a company’s financial performance. A multi-step statement is an income statement prepared to report a company’s sales and revenue, expenses and overall profit or loss for any given period. It is a detailed report unlike the single-step income statement and utilizes multiple accounting equations to calculate net profit for a business. For example gains/losses on sales of investments or fixed assets, interest revenue/expense etc. It also includes extraordinary items of revenues and expenses which are infrequent and unusual such as loss due to natural calamity.

At Taxfyle, we connect individuals and small businesses with licensed, experienced CPAs or EAs in the US. We handle the hard part of finding the right tax professional by matching you multistep income statement format with a Pro who has the right experience to meet your unique needs and will handle filing taxes for you. Double Entry Bookkeeping is here to provide you with free online information to help you learn and understand bookkeeping and introductory accounting. To illustrate a typical real life example of a multi step income statement is shown below.

The format of the multi-step income statement contains Selling and Admin Expenses as the second section. It notes all company operating expenses in two categories that are Selling and Administrative. This is particularly helpful for analyzing the performance of the business. 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.

The net profit shows the company’s net profitability after deducting the operating expenses and expenses such as taxes and interest paid on debts. 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. The Board of Directors will receive a financial statement package, including the (multi-step) income statement, that includes analysis and interpretations of trends by the financial analyst team and the company’s CFO. This sample multi-step income statement from Accounting Coach shows the layout of a multi-step income statement with the separation between operating and non-operating activities. 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.

• Here is one example of a multi-step income statement format for XYZ Company for the year 2020.
• 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.
• The multistep income statement gives far more detail than the single step statement, but it can also be more misleading if not prepared correctly.
• Unlike the operating section, the non-operating section is not split into subcategories.

However, the multi-step income statement divides and categorizes the operating income and expenses into multiple steps, providing a more detailed and clear picture of the company’s financial activities. This approach allows for a more accurate analysis of the company’s profitability and helps identify specific areas where improvements can be made. By creating a multi-step income statement, companies can better understand their revenue streams, cost of goods sold, and operating expenses, leading to more informed decision-making and strategic planning. Overall, using the multi-step income statement benefits companies seeking a more detailed and comprehensive overview of their financial performance.

Importance of Multi Step Income Statement

These get recorded in other revenue and expenses (or non-operating revenue and expenses). Following this comes your operating profit, operating costs, and any other revenue and expenses. In financial accounting, the two types of income statements are the standard single-step income statement and the multiple-step income statement. Unlike the single-step income statement that uses only one accounting equation to compute the net profit, businesses will need to use multiple accounting equations to derive at the bottom line. Companies use the multi-step income statement and the balance sheet for financial ratios analysis. Businesses can benchmark performance with other companies in their industry to find comparables for their type of business.

Time Value of Money

If a tree hit the building and the insurance company paid out a small settlement, the income would not be reported with total sales. It would be reported in the non-operating and other section because it doesn’t have anything to do with sales. Examples of non-operating expenses include inventory write-offs, interest expenses, and income tax. The importance of using a multi-step income statement lies in its ability to depict a company’s financial state. It enables a more accurate assessment of business operations and facilitates better decision-making by providing a detailed breakdown of various income and expense components.

What are the 3 Main Parts of a Multi Step Income Statement?

An accounting period is the time during which you record and accumulate your financial transactions. At the end of this period, you prepare your books for financial statements. Although the single-step income statement is easy to use, it doesn’t give you much detail about where your money comes from or goes to. It’s useful for general business operations, but less so for strategic decision-making. It also may not be as useful if you want to attract investors or apply for funding.

Investors and lenders can use a multi-step income statement to analyze how effectively a company’s core business activities are performing. It allows the user to see the impact of the company’s day-to-day activities separate from its investing and other non-operating activities. Finance and accounting professionals will also use the multi-step income statement to compare between companies, as it allows for comparisons for the gross profit margin or the operating profit margin. Because of this greater detail, the multi-step income statement is often used for financial ratio analysis. The gain may be a one-time item such as a winning lawsuit or insurance settlement. The gain does not relate to the company’s core business activities, so it is listed in the non-operating section of the income statement.

Add the final calculation as a line item at the bottom of your operating activities section, titled Net Operating Income or Income from Operations. Generally, businesses that use multi-step income statements are large, complex companies. Most small businesses and sole proprietorships can get by with just a single-step income statement, since their operations and accounting tend to be straightforward. Multi-step income statement is one of the two most commonly used income statement formats, the other being the single-step income statement. Multi-step income statement involves more than one subtraction to arrive at net income and it provides more information than a single-step income statement.

The net income line is calculated as Operating income less net Non-operating expenses. A multi step income statement is more detailed than a simple single step income statement. It provides insights that financial statement users need when reading a profit and loss statement prepared using GAAP accounting standards. Before you prepare your income statement, you need to select a reporting period. Publicly traded corporations are required by law to prepare financial statements both quarterly and annually.

Understanding Components of a Multi-Step Income Statement

Hence, the potential investors and creditors will gain better clarity of your company’s financial footing, which helps boost your chances of getting funding and bank loans. Each company will have to pay income tax to the government depending on the tier’s of income that they fall into. There are two methods to calculate the Cost of Good Sold such as by using periodic method or perpetual method. In the above example, we follow the periodic format to compute the Cost of Goods Sold. In a perpetual system, the Cost of Goods Sold is added at the time of the transaction instead of using a periodic difference. The sales account is the total amount of sales derived from selling the company’s goods and services.