Multi-Step Income Statement: Is It Right for Your Business? (2024)

The multi-step income statement provides businesses with detailed information on their business health and profitability. See if this income statement is right for your business.

One of the top three financial statements, the income statement measures company performance. Also known as a profit and loss statement, the income statement provides an overview of revenues and expenses incurred during a specific period of time.

While the single-step income statement is suitable for smaller businesses, other businesses will appreciate the level of detail offered in a multi-step income statement.

Overview: What is a multi-step income statement?

The multi-step income statement provides detailed reporting of your company’s revenues and expenses using multiple steps to arrive at net income. Multi-step income statement items include revenue, cost of goods sold, and expenses, which are calculated to arrive at net income.

Unlike the simple, single-step income statement, the multi-step income statement differentiates between operating and non-operating revenues and expenses, giving both business owners and investors a better look at company operations and profitability levels.

The multi-step income statement requires a three step calculation:

Step 1: Calculating gross profit or gross margin: The first step in a multi-step income statement is calculating gross profit or gross margin. This is done by subtracting the cost of goods sold in the first section of the statement rather than listing it with other expenses.

Multi-Step Income Statement: Is It Right for Your Business? (1)

ABC Plumbing Income Statement with gross profit Image source: Author

Step 2: Calculating operating income: The second step is to calculate operating income for the period. This is done by subtracting operating expenses from gross profit.

Multi-Step Income Statement: Is It Right for Your Business? (2)

ABC Plumbing Income Statement with gross profit and operating expenses Image source: Author

Step 3: Calculating net income: The final step is calculating net income. Now that you have gross profit and operating income totals, you’ll need to add in any non-operating income or expenses and add or subtract those amounts from your operating income to arrive at net income.

Multi-Step Income Statement: Is It Right for Your Business? (3)

ABC Plumbing Income Statement with gross profit, operating and non-operating expenses Image source: Author

Income statement vs. multi-step income statement: What’s the difference?

The single-step income statement is the simplest income statement format, calculating revenue totals and subtracting expenses to arrive at net income.

The easiest income statement to prepare, the single-step income statement provides an at-a-glance look at revenues and expenses, which most smaller businesses will find sufficient.

More complex than its single-step counterpart, the multi-step income statement uses a three-step process to calculate net income that is used in the preparation of a single-step income statement. Here are some other ways that the multi-step income statement is different:

1. Preparation ease

The single-step income statement is the easiest income statement format to prepare, focusing mainly on net income.

On the other hand, the multi-step income statement requires three steps to complete, resulting in more detail about business operations, making it particularly valuable to investors and financial institutions.

2. Ability to calculate gross profit

One of the biggest differences between a single-step income statement and a multi-step income statement is the ability to calculate gross profit. This metric is important for business owners that need more detailed information on both business profitability and financial performance.

Because gross profit focuses only on sales revenue and cost of goods sold, business owners have a better idea about how profitable their core business operation really is.

3. Ability to calculate operating income

Another measurement available from the multi-step income statement is operating income. Like gross profit, operating income provides business owners with more detailed information on company profitability rather than focusing solely on net income.

Should your small business use a multi-step income statement?

If you’re a sole proprietor, freelancer, or consultant, a single-step income statement is sufficient. The single-step income statement is easier to prepare and provides the information you need.

However, if your business is in a growth stage, or you’re looking to obtain a bank loan or attract investors, a multi-step income statement provides details that are missing from the single-step income statement.

If you’re not sure which income statement is right for you, check out the chart below for guidance:

How a multi-step income statement works

Preparing a multi-step income statement requires more time and work than its counterpart, so let’s get started:

Step 1: Determine your accounting period

Income statements enable you to choose a monthly, quarterly, or yearly income statement period, depending on your needs.

Step 2: Run a trial balance

Run a trial balance for the same period that your income statement will cover. If you’re creating a multi-step income statement for the first quarter of 2020, your trial balance should be prepared for the same quarter.

Step 3: Calculate revenue totals

Add up all of your revenue for the income statement period. Be sure to only include revenue from sales, as any other revenue will be calculated in a later step.

Step 4. Calculate cost of goods sold

The next step when preparing a multi-step income statement is to calculate the cost of goods sold. This includes any materials required for manufacturing as well as direct labor costs for employees directly involved in the manufacturing process.

If you purchase products for resale, your cost of goods sold is the cost of purchasing those products.

Step 5. Calculate gross profit/gross margin

Subtract the cost of goods sold from your sales revenue in order to arrive at your gross profit or gross margin. This number tells you how efficient and profitable your core business is.

Step 6: Calculate operating expenses

When calculating operating expenses, don’t include any expenses already included in the cost of goods sold, such as direct labor and materials purchased.

Step 7. Calculate operating income

The next step is to subtract the total of your operating expenses from your gross profit in order to arrive at operating income. Operating income measures the amount of income from operations excluding all non-operating income and expenses.

Step 8. Calculate other revenue and expenses

If you have non-operational revenue or expenses, they will need to be added to your income statement. These can include the following:

  • Interest income
  • Interest expense
  • Gain or loss on investments

You can also include taxes in this section, or if you’re looking to create EBIT (earnings before income taxes), you can create a separate section for taxes.

Step 9. Calculate net income

The final step for preparing your multi-step income statement is determining your net income. This is done by subtracting other revenue and expense totals from your operating income.

Multi-step income statements are worth the effort

If you’re a sole proprietor or independent contractor, you can certainly get by using a single-step income statement. But for established businesses as well as businesses looking to apply for a loan or attract investors, a multi-step income statement is worth the extra steps.

If you’re still struggling to track your business revenues and expenses in multiple ledgers, it may be time to move to accounting software. To see some of the best products available, be sure to check out The Ascent’s accounting software reviews.

Multi-Step Income Statement: Is It Right for Your Business? (2024)

FAQs

Multi-Step Income Statement: Is It Right for Your Business? ›

Unlike the simple, single-step income statement, the multi-step income statement differentiates between operating and non-operating revenues and expenses, giving both business owners and investors a better look at company operations and profitability levels.

What is an advantage to using a multi step income statement answer? ›

Advantages of a Multi-Step Income Statement

The multi-step income statement helps users in analyzing the performance of the business. Investors, lenders, and other key stakeholders monitor the gross margin of the business, which is calculated as a percentage of net sales.

Why might a company choose to use the multiple step income statement? ›

The siloed breakdowns in multiple-step income statements allow for deeper analysis of margins and provide more accurate representations of the costs of goods sold. Such specificity gives stakeholders a sharper view of how a company runs its business, by detailing how the gross, operating, and net margins compare.

Why is the multi-step income statement generally accepted as the best format? ›

A multi step income statement is important because it provides the company, investors, lenders, and other stakeholders deep insight into a company's financial performance during a period of time and its operating trends. These are advantages or pros compared to the single-step income statement format.

What is the use of a multiple step income statement will result? ›

Advantages of Multi-Step Income Statements

Report Gross Profit: Unlike a single-step income statement, multi-step income statements report on gross profit. Gross profit is an important metric because it shows how efficiently a business uses labor and supplies to generate revenue.

What are the challenges of multi-step income statement? ›

From an accounting perspective, a drawback of the multi-step income statement is that it takes much longer to prepare than a single-step statement. Not only is each category of income separated, but within each category, the statement provides a detailed list of major sources of revenue and expenses.

What is an advantage of the single-step income statement over the multiple step form? ›

One clear advantage of the single-step format is that it's an easy statement to prepare. Its focus on net income is also particularly useful when a user is making an assessment that depends on net income, or the bottom line.

What kind of company or business would use the multi-step income statement? ›

Larger businesses, especially businesses with more than one product line, almost always use multi-step income statements. All corporations with publicly traded stock use the process, because it's required by regulators and follows generally accepted accounting principles (GAAP).

What is one advantage of using the multiple step statement of income is that it select answer from the options below? ›

One benefit of the multi-step income statement is it highlights the components of net income. For merchandising companies, the components are broken out into gross profit, income from operating activities, and results of activities not related to operations, to arrive at net income.

Why might a company choose to use the multiple step income statement quizlet? ›

Why might a company choose to use the multiple-step income statement? The multiple-step income statement highlights the intermediate components of net income.

What is on a multi-step income statement? ›

When doing a multiple step income statement, one must remember the key elements. They are: Net Sales, Cost of Goods Sold, Gross Profit, Total Operating Expenses, net gain/loss from other activities, Income before taxes, Income tax expense, and Net Income.

What is the advantage of using multi-step income statement chegg? ›

What is an advantage of using the multiple - step income statement? Net income will be higher than net income computed using the single - step income statement. It highlights the components of net income. Gross profit is not a separate item.

Why is a Multistep income statement useful to financial statement users ____? ›

Expert-Verified Answer. A multistep income statement is useful to financial statement users because it: Provides a much greater detail about an account than simple income statement.

What is an advantage to using a multi-step income statement review later? ›

Advantages of a Multi-Step Income Statement

Assists in better analyzing the financial performance and the general health of a company. Investors, creditors, and other stakeholders of interest monitor the gross margin (gross profit divided by revenue) to analyze how efficient a company's operations are.

Why is the multiple-step income statement considered more useful than the single-step income statement? ›

Answer and Explanation:

The multiple-step income statement is often preferred by investors since it shows important subtotals such as the Gross Profit, Operating Income, EBITDA, and Net Income Before Tax instead of simply showing all expenses grouped together as in the single-step income statement.

Do multiple-step income statements contain more detail than a simple listing of revenues and expenses? ›

Answer and Explanation:

Multi-step income statements b) contain more detail than a simple listing of revenues and expenses. The multi-step income statement has a systematic approach to understanding revenues and expenses and can demonstrate where a company's gains or losses come from.

What is an advantage to using a multi-step income statement quizlet? ›

What is an advantage of using the multiple-step income statement? It highlights the components of net income.

What is an advantage to using a multi-step income statement in Chegg? ›

What is an advantage of using the multiple - step income statement? Net income will be higher than net income computed using the single - step income statement. It highlights the components of net income. Gross profit is not a separate item.

What is an advantage to using a multi-step income statement brainly? ›

Expert-Verified Answer

The major advantage of a multiple-step income statement over a single-step income statement is that it provides a more detailed and comprehensive overview of a company's revenues, costs, gross profits, operating expenses, and net income.

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