Single-Step vs Multiple-Step Income Statements

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. Going back to our retailer tax deductions guide, 20 popular breaks in 2021 example, the total sales figure would include all merchandise sales made during the period and the cost of goods sold would include all expenses paid to purchase, ship, and get the merchandise ready for sale. The gross margin computes the amount of money the company profits from the sales of its merchandise. This is simply the cash flow in from the sales of merchandise and the cash flow out from the purchase of that merchandise.

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. Preparing statements monthly can help you track changes in your profits over time. Follow our guide on how to prepare an income statement to accurately record data, which will help you gain valuable insights essential for making financial decisions for your business, such as whether to invest in new equipment.

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Gross profit is used by creditors to show the company’s ability to meet arising debt obligations and to pay back outstanding credit. Small businesses with a simple operating structure, including sole-proprietorships and partnerships, can choose between creating single-step or multi-step income statements. 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. 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.

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 operating section is subdivided into two main sections that list the primary business income and expenses. The first section computes the gross profit of the business by subtracting the cost of goods sold from the total sales.

1. The calculation of the first section shows the gross profit of business by deducting the cost of goods sold (COGS) from the total sales.
2. For a company that sells goods (merchandise, products) the first subtotal is the amount of gross profit.
3. This is simply the cash flow in from the sales of merchandise and the cash flow out from the purchase of that merchandise.
4. This total expense line is subtracted from the gross profit computed in the first section to arrive at the company’s operating income.

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

An income statement, also called a profit and loss statement, is one of three major financial statements that all businesses should prepare as part of their financial accounting, along with a balance sheet and a cash flow statement. The multi-step income statement shows important relationships that help in analyzing how well the company is performing. For example, by deducting COGS from operating revenues, you can determine by what amount sales revenues exceed the COGS. If this margin, called gross margin, is lower than desired, a company may need to increase its selling prices and/or decrease its COGS. The classified income statement subdivides operating expenses into selling and administrative expenses. Thus, statement users can see how much expense is incurred in selling the product and how much in administering the business.

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To calculate the gross profit, subtract the cost of goods sold from the net sales. Add the final number as a line item under the cost of goods sold and title it Gross Profit. Having the additional breakdown is useful for lenders and investors to understand the business better and decide whether a company is worth working with. However, the choice of the format depends on the type of company, its rules, regulations and needs. It should also take into consideration the requirements and preference of users who will refer to the statements for making financial decisions.

All publicly-traded companies in the U.S. must adhere to Generally Accepted Accounting Principles (GAAP), which are accounting standards issued by the Financial Accounting Standards Board (FASB). Many private companies elect to follow GAAP, even though they aren’t legally obligated to do so. In any case, GAAP gives companies the option of issuing either single-step or multiple-step income statements, depending on how they’re structured. 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.

Add Operating Expenses

This would include cost of goods sold, as well as costs such as advertising expenses, salaries and administrative expenses, including office supplies and rent. Net Income can be calculated by adding or subtracting the various non-operating expenses from operating profit. On this multi-step income statement, there is interest expense, interest income, a non-operating gain, and income tax expense. You should add the interest income and non-operating gain and subtract the interest expense and income tax expense from operating profit. The multistep income statement gives far more detail than the single step statement, but it can also be more misleading if not prepared correctly. For instance, management might shift expenses out of cost of goods sold and into operations to artificially improve their margins.

The income statement shows the total revenue attributable to the primary activities of the business, excluding revenues from non-merchandise-related sales. 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. Let us understand how to prepare multi-step income statement and how to identify the items that should be included under each head.

Investors also use the gross profit to determine the profitability of primary business activities and the general health of the company. When calculating gross profit, no other expenditures are included apart from the cash inflow from the sale of goods and cash outflow from the purchase of goods. 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.

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. 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. Operating income and expenses are directly related to the depreciation conventions company’s primary business activities, while non-operating income and expenses are not directly related and include transactions such as interest, write-offs, and lawsuits.