Multi-Step Income Statement
A multi-step income statement is a type of income statement that includes several intermediate steps in the calculation of net income. This format is more complex than the simple, single-step income statement, but it provides more detailed information that can be useful for understanding a company’s financial performance.
The multi-step income statement typically includes the following sections:
- Operating Section : This part of the statement details revenues and expenses directly related to the company’s main operations. This includes sales revenue, cost of goods sold (COGS), and operating expenses. From these figures, it calculates gross profit (sales revenue minus COGS) and operating income (gross profit minus operating expenses).
- Non-Operating Section: This section includes revenues and expenses not directly related to the main operations. This can include things like interest income or expense, gains or losses from the sale of assets, and other non-operating items.
- Income Tax Section: This section shows the provision for income taxes, which is subtracted from income before taxes to arrive at net income.
By breaking down the income statement in this way, the multi-step format can provide a clearer picture of where a company’s profits are coming from and where its expenses are going. For example, by separating operating and non-operating items, it makes it easier to see how much profit the company is making from its main business activities, as opposed to peripheral activities or one-time events.
Example of a Multi-Step Income Statement
let’s say we have a fictional company called “ABC Widgets Inc.” Below is a simplified example of how ABC Widgets Inc. might prepare a multi-step income statement:
ABC Widgets Inc.
Income Statement
For the Year Ended December 31, 2023
Sales Revenue: $1,000,000
Less: Cost of Goods Sold (COGS): $600,000
Gross Profit: $400,000 (Sales Revenue – COGS)
Operating Expenses:
Selling Expenses: $50,000
Administrative Expenses: $100,000
Total Operating Expenses: $150,000
Operating Income: $250,000 (Gross Profit – Total Operating Expenses)
Non-operating Revenues and Expenses:
Interest Expense: $10,000
Gain on Sale of Equipment: $5,000
Total Non-operating Expenses: $5,000 (Interest Expense – Gain on Sale of Equipment)
Income Before Taxes: $245,000 (Operating Income – Total Non-operating Expenses)
Income Tax Expense: $73,500 (Assuming a tax rate of 30%)
Net Income: $171,500 (Income Before Taxes – Income Tax Expense)
This is a simplified example, and real-world income statements can include additional line items and complexities. However, the basic structure of separating operating from non-operating items, and calculating intermediate figures like gross profit and operating income, is a characteristic feature of the multi-step income statement.
