Single-Step Income Statement
Single-Step Income Statement
Multiple-Step Income Statement and Gross Profit
A multiple-step income statement is an income statement with multiple sections, subsections, and subtotals, including gross profit. It uses multiple steps to disclose operating income, income from continuing operations, net income, and comprehensive income, separating the operating income and operating expenses from the nonoperating income and expenses, gains, and losses. It is generally preferred by larger businesses as it allows investors a better understanding of the financial strength of the company. A multiple-step income statement is so named because it uses multiple steps to arrive at net income. It reports the gross profit, subtracts operating expenses, and subtracts nonoperating expenses to reach net income. Several steps are involved in preparing this type of income statement.
The first line of the multiple-step income statement is sales. Sales include the revenue a company generates during the financial statement period. For example, if a company sells $100,000 worth of products during the year, then that amount would equal sales during the financial statement period for a yearly financial statement. Also, sales less sales returns combined with allowances less sales discounts equals net sales. Net sales less cost of goods sold equals gross profit.Cost of merchandise sold and cost of goods sold are synonymous terms. Cost of goods sold looks at the total cost of the business's goods that were sold during the year. The basic formula to calculate this is:
How to Prepare a Multiple-Step Income Statement
Calculating gross profit is a crucial step in the multiple-step income statement. However, there are additional steps necessary to fully communicate the organization's performance to financial statement users. After gross profit is entered, operating income, interest expense, taxes, discontinued operations, extraordinary items, and other comprehensive income are also presented.Operating income, which is income earned from normal business operations, is determined next. It is calculated as gross profit less operating expenses. Common operating expenses can include advertising, sales commissions, supplies, or office equipment. Operating income excludes taxes and interest from the gross profit and reduces it by any operating expenses. These expenses are basically anything that involves the day-to-day operations of the company.
Other revenues and expenses are items not related to the operation of the company. Common forms of other revenue and expenses include interest income, interest expenses, and dividends. Usually most of the revenues and expenses come from investments, as they are a common source of revenues that do not directly come from the company's operations.Next, calculate net income, which is the amount of income left after all expenses have been deducted, including common nonoperating income and expenses. These may include interest revenue, interest expenses, sale of investments, or any income or expenses that do not relate to the operations of the business.