Multi Step Income Statement

Multi-Step Income Statement is the company's income statement which segregates the company's total operating revenue from non-operating revenue and total operating expenses of the company from non-operating expenses thereby separating the total revenue and expense of a particular period into two different sub-categories i.e., operating and the non-operating.

Thus, it provides a complete breakdown of the revenue and expense list in the income statement. It is very useful in the detailed analysis of the company’s financial condition for a specific period. Since the items are clearly listed, it becomes very easy for the users to analyse the core operation of the entity.

A Multi-Step Income Statement is a statement that differentiates among the incomes, expenditures, profits, and losses into two important sub-categories that are known as operating items and non-operating items.

The multi-step income statement lists down all these items in different sections or categories, which makes it convenient for the users to gain an understanding of core business operations in a better way. On the other hand, in the format of the single-step income statement all the revenues are combined under one main head, i.e., income listing and all the expenditures are put together under Expenses head.

Multi-step income statement format is any day better than a single-step statement as it provides proper detailing. But, if it is not prepared correctly, it can be misleading. The company's management might shift the expenses from the cost of goods sold to the operations to improve their margins artificially. It is very significant to view the comparative financial statements over time so that one can see and judge the trends and then possibly catch the misleading placement of the expenditures.

It is beneficial for both the company management while making any important decisions related to any department and the organization's various stakeholders because it gives a lot of details and a good breakup of all the possible heads that can be identified under the income and expenses. However, since the items depend on the sector or the type of company, industry, and the accounting rules followed in the organization, peer comparison may take some work.  

Let us understand how to prepare a multi-step income statement. Below is the Format of the same. It is divided into two main headings – Operating Head and Non-Operating Head. Below is a complete multi-step income statement template that will clarify the idea.

The Operating head is further divided into two important headings, which list primary business incomes and the expenditures. It is usually known as a Trading Account, where Direct Incomes and Expenses are mentioned.

Let us understand how to prepare multi-step income statement and how to identify the items that should be included under each head.

# 1 - Operating Head - Gross Profit

The multi-step income statement template contains Gross Profit as the first section. The calculation of the first section shows the gross profit of business by deducting the cost of goods sold (COGS) from the total sales. It is an important figure for the creditors, investors, and internal management as it depicts how profitable a company is at selling the goods or making the products.

For example, the Multi-step income statement of the retailer will have the figure of total sales that includes all the merchandise sales that are made during that period, and the cost of goods sold includes all the expenditures incurred while purchasing, shipping, or conveyance, and getting the merchandise ready for sale. Gross margin is the amount the company earned from selling their merchandise. The thing to be noted is that no other expenditures are included yet. It is simply Cash Inflow from Merchandise sales and Cash Outflow from purchasing the merchandise. This section helps measure the health of business and the profitability of core business activities.

#2 - Operating Head - Selling and Admin Expenses

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.

• Selling Expenses - Expenditures incurred to sell the products. Expenditures like advertising, the salary of a salesman, freight, and commissions are included in selling expenses.
• Administrative Expenses- Expenditures which are indirectly related to the selling of the product like the salary of the office staff, rent, and supplies are treated as

Both selling and administrative expenses are added together for computing total operating expenses. And the Company's Operating income is calculated by deducting these total operating expenses from the gross profit in the first section.

#3 - Non-Operating Head

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. For instance, a retailer is not into the insurance business, and a car hits their store. The insurance company paid an amount out of the settlement so that proceeds received from the insurance company will not be considered in total sales; rather, it will be a non-operating income. Hence, it will come in the non-operating and other heads.

• Other returns and expenses like lawsuit settlements, interest, losses, and gains from investments and any extraordinary items come under this head. There are no sub-categories in the non-operating head as they were under the operating head. It just lists down all kinds of activities and totals them in the end.
• 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.

Thus, the above details give a clear understanding about the multi-step income statement accounting and also the various heads that are mentioned in it.

Let us prepare a multi-step income statement with the help of an example

This statement is a valuable tool for preparing and analyzing financial performance. Here are some advantage of multi-step income statement.

• A Multi-Step Income Statement helps analyse the overall performance of a business. Creditors and investors can evaluate how efficiently an organization is working and performing.
• One can easily judge how a company performs its essential functions indifferent from its other activities.
• Like for a multi-step income statement example, the main function of a retailer is to sell his merchandise, and the creditors and the Investors are keen to know how well and conveniently that retailer can sell his merchandise without any dilution in the numbers together with the other profits and the losses from the non-merchandise related sales. 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. For this purpose, a Multi-Step Income Statement is a solution.

So, we get various details of the advantage of a multi-step income statement from the above points.

The process has some limitations too, as discussed below:

• Since the statement has multiple sections, and the operating revenues and expenses are broken up in detail, it becomes quite complex and challenging for users to follow and interpret it accurately which becomes a bigger challenge for people from non-finance background.
• The segregation of items as income and expense is very subjective. The decision may vary from company to company. This difference in treatment may make the comparison difficult for users.
• There is always a possibility of manipulation because it gives flexibility to the accountants of the organization to alter individual figures and make the financial results attractive and raise the level of company performance.
• It cannot be considered alone for judging the financial performance. Along with it the balance sheet and cash flow statement should be used to take important financial decisions.
• It concentrates mainly on the financial matters that influence the results of the organization. But in the process, it ignores and non-financial matters like customer satisfaction, market share, economic problems, technological development or changes, etc, which also greatly influence the company’s financial condition.

Thus, while making any decision, it is essential to look at the benefits, limitations, and other documents, statements, and reports that will help determine the entity's financial stability.

The above are two different ways of presenting the income statement of a company. Let us understand the difference between them.

• The multi-step income statement accounting is more detailed, whereas the latter is more straightforward.
• The former provides a breakdown of the items included in the revenues and expenses whereas the latter gives a consolidated figure.
• The former gives a clear insight into the details of gross profit, operating profit and net profit but this is not the case with the latter.
• The former is more common for big companies with complex transactions, whereas the latter is more suitable for small companies.

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.

This article has been a guide to what is Multiple-Step Income Statement. We explain it with example, advantage, format and how to prepare it. You may learn more about our articles below on accounting –

• Income Statement Basics
• Purpose of Income Statement
• Pro Forma Income Statement
• Statement of Comprehensive Income