What is a multi-step income statement?
A multi-step income statement gathers a variety of financial data to calculate intermediate subtotals that ultimately result in a company’s net income.
Multi-step income statements follow a 7-step process and can offer more detailed financial insights into a company, which generally benefits management as well as potential investors or creditors.
While small businesses can create their own multi-step income statement format, it’s typically most useful for publicly traded companies and businesses that have more complex operations.
Why it’s called “multi-step”
Multiple calculations are needed to create several subtotals that are then used to find a business’s net income.
Who typically uses this format
Multi-step income statements are typically used by publicly traded companies, manufacturers, retailers, and businesses that deal with cost of goods sold (COGS) or that have more complex operations.
Structure of a multi-step income statement
Operating section overview
Operating activities relate to the company’s core business and generally include sales or income, COGS, gross profit, overhead expenses, and operating income.
Non-operating section overview
Non-operating items are incidental to the main business and may include things like interest paid or received and gains or losses on the sale of an asset.
Step-by-step breakdown of a multi-step income statement
- Net sales (revenue): Net sales = gross sales – (returns + allowances + discounts)
- Cost of goods sold (COGS): This refers to the costs directly related to producing goods or services sold by the company.
- Gross profit: Gross profit = net sales – COGS. This calculation helps assess production efficiency and pricing strategy.
- Operating expenses: This category breaks down into two subcategories. The first category contains selling expenses that are associated with money spent on selling a product or service (like marketing or shipping costs). The second category involves general and administrative (G&A) expenses, which is money spent on running the business. Examples include office staff salaries and insurance costs.
- Operating income: Operating income = gross profit – operating expenses. Operating income can be a key performance metric because it separates core operations from non-core activities, which can make financial performance easier to evaluate.
- Non-operating items: This includes any interest a company received or paid, any gains or losses from selling assets, and other incidental items not related to core business.
- Income before taxes & net income: To calculate net income, you’ll need to subtract the taxes paid from the income received before taxes.
Why companies use a multi-step income statement
Better financial analysis
It allows for a more granular look at finances which can then be used to track performance compared to similar companies.
Clear separation of core vs non-core activities
It may be easier to see how much a company spent and earned on its core and non-core activities.
Improved decision-making
Company management may have a clearer picture that helps them make more informed decisions for the business.
Advantages of a multi-step income statement
Highlights gross profit and operating income
Companies can see whether they’re efficient and if they’re measuring up to their profitability goals by viewing how much money was made and spent on COGS.
More useful for investors and creditors
The statement offers insight into how a company is performing in multiple areas, rather than just the bottom line (net income).
Aligns with GAAP practices and financial reporting standards
Generally Accepted Accounting Principles (GAAP) help harmonize financial report formatting across companies.
Disadvantages or limitations
More complex to prepare
Multiple pieces of information and multiple calculations go into preparing these statements.
Not always necessary for small businesses
Small businesses with less complicated finances usually don’t need to use this method.
Potential for misclassification errors
Without clear definitions of operating vs non-operating items, financial data may easily be misclassified.
How to prepare a multi-step income statement
Gather revenue and expense data
Include all information about income and expenses, which you can typically get from your account balances or trial balance (which itemizes all financial info for a certain window of time).
Classify expenses correctly
Generally, the COGS, operating expenses, and non-operating items are separated.
Calculate subtotals in the correct order
Follow the earlier step-by-step instructions in order to calculate the subtotals in order.
Review for accuracy and consistency
It can be helpful to double-check your financial information, making sure your totals match your financial records.
Common mistakes to avoid
- Mixing operating and non-operating items
Forgetting to subtract returns or discounts from sales
Misclassifying COGS as operating expenses
Skipping intermediate subtotals
Inconsistent formatting across periods
Bottom line
Multi-step income statements require more complex financial data, but they can also provide a more granular view of a company’s financial health. Not every business benefits from multi-step income statements, but publicly traded companies often use a multi-step format because it provides clearer separation of operating and non-operating results and aligns with common GAAP presentation practices. Following the steps to calculate intermediate subtotals in order can help you understand your company’s operating and non-operating categories along with an overall picture of net income and profitability.
To learn more about income statements and finances, you can visit Raisin’s education center. Visit Raisin’s education center for more guides on financial statements and business finance topics.
Frequently asked questions
It provides an opportunity to understand the income from a company’s core business and how efficient they are with the goods or services they offer.
Companies can typically choose a single-step or multi-step income statement under GAAP.
Publicly traded companies, manufacturers, retailers, and businesses that deal with cost of goods sold (COGS) or that have more complex operations usually benefit the most from using a multi-step income statement.
They can, although it may not suit their financial needs as well as a single-step income statement.
The above article is intended to provide generalized financial information designed to educate a broad segment of the public; it does not give personalized tax, investment, legal, or other business and professional advice. Before taking any action, you should always seek the assistance of a professional who knows your particular situation for advice on taxes, your investments, the law, or any other business and professional matters that affect you and/or your business.
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