Potential investors and creditors may ask for such statements to get a detailed insight into the gross profit and operating income. 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.

However, the multi-step income statement provides more detailed information about a company’s financial performance. List out the non-operating revenues and expenses such as interest, gains and losses on asset sales, and other one-time revenues or expenses. An income statement is an important financial report that provides rich information on how a business or company is doing and how it’s likely to perform in the future. Used in both managerial and financial multi step income statement example accounting, it is an invaluable resource to internal and external stakeholders alike. This income statement format is helpful for investors, creditors and other stakeholders to evaluate and analyze the performance of business. Its presentation is very much useful to understand the performance of business core functions. The results obtained from this report are of profit prospect and used for determining different sort of profitability ratios.

Step 1: Gather Required Information

The sum of non-operating incomes and expenses is called a ‘non-operating item’. An example of a multi step income statement is Arrow Electronics, Inc.’s Consolidated Statements 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 11, 2022. Now to check them, all expenditures and incomes cannot be clubbed together but are to be listed separately into some proper heads, which are meaningful and easy to understand. Once all the items of Non-operating head are totaled, the net income for the period is computed by deducting or adding the total of the non-operating head from or to the income from operations. Any Extraordinary ItemsExtraordinary Items refer to those events which are considered to be unusual by the company as they are infrequent in nature. The gains or losses arising out of these items are disclosed separately in the financial statement of the company.

As discussed above, the multi-step income statement is like a single-step income statement, but the difference only lies in the representation part. In a multi-step income statement, the calculation is broken down into several parts to arrive at the net income figure at the bottom line. The gross profit is too separately calculated and shown in such an income statement. Here, operating expenses and operating revenues are separated from non-operating and non-operating revenues and separately in different steps. A multi-step income statement will use multiple equations to arrive at the final net income figure. Basically, a multi-step income statement will use three different formulas to arrive at the final net income figure. The formula for the same will be discussed in the following topic of this article.

Types of Business that Use Multi-Step Income Statement

With the calculation of operating income, you are able to analyze the operations of the business. Through the operating expenses, you can determine the health of a business. Upper management, investors, and creditors analyze gross profit since the metric shows how profitable a company is at selling the products it manufactures. Gross profit and gross profit margin, which is gross profit as a percentage of sales, may reveal the need to increase net sales or decrease costs of goods sold. The separation of operating items and non-operating items make it easy to see the performance of the core business activities and what effect non-core activities had of net income (non-operating). Operating ExpensesOperating expense is the cost incurred in the normal course of business and does not include expenses directly related to product manufacturing or service delivery.

This figure is found by subtracting the remaining operating expenses from gross profit. Operating expenses are costs that are incurred to support the company’s regular operations. As discussed above, we saw how multi-step income statements are useful for investors and creditors to get a detailed insight into a company’s financial performance and the pros and cons of using it. The example attached also helped us to understand the different components used in such a statement. The format of the multi-step income statement contains Non-Operating Head as the third section. The non-operating and the other head list all kinds of business incomes and expenses unrelated to a business’s principal activities.

Single-Step vs. Multi-Step Income Statement

Only licensed accounting professionals authorized by the relevant governing bodies for the territories they operate in can carry out the auditing of financial statements. From the following example, students would be able to understand this format of multi step income statement. Often smaller companies will choose to use a single-step income statement due to its ease and simplicity. However, for larger public organizations a multi-step format is the most desirable due to it being more comprehensive and the fact that they are under greater scrutiny from regulators and auditors to do so as well. A single-step income statement shows only net income, whereas a multi-step income statement shows gross profit in addition to net income. An example of a non-operating expense is a lawsuit claim paid by the company.

A Multi-Step Income Statement helps analyze the overall performance of a business. Creditors and investors can evaluate how efficiently an organization is working and performing. In any business, customers can return the goods as the https://www.bookstime.com/ product might be broken, faulty, or may malfunction. Such transactions are what you observe under Sales Return and Allowances account. There is no implication that one type of revenue or expense item has priority over another.

Its format separates a company’s operating revenue and operating expenses from its non-operating revenue and non-operating expenses. A simple multiple step income statement separates income, expenses, gains, and losses into two meaningful sub-categories called operating and non-operating.

• The multi-step income statement categorizes operating and non-operating incomes and expenses.
• The major sections of a multi-step income statement are the revenue, cost of goods sold, gross profit, operating expenses, operating income, and net income.
• Operating Expenses Gives Operating IncomeOperating Income, also known as EBIT or Recurring Profit, is an important yardstick of profit measurement and reflects the operating performance of the business.
• Multi-step income statement format is any day better than a single-step statement as it provides proper detailing.
• However, operating income can show the health of the business and when that item is decreasing or goes negative, it may raise red flags to stakeholders.
• As an example, let’s suppose a clothing manufacturing company has an overall net profit for a year.

Businesses may include a subtotal for Total expenses in a single-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. The gross margin is then compared to the company’s past gross margins and other comparable entities’ gross margins to determine how efficiently the company is performing. A multi-step income statement can be prepared using either the accrual basis or the cash basis of accounting.