For a company that sells goods (merchandise, products) the first subtotal is the amount of gross profit. Management accountants use another type of multi step income statement for internal use that separates fixed and variable costs to compute the contribution margin. Another application for a multiple-step income statement is dividing costs into direct and indirect costs for cost accounting by management accountants.

It separates revenues and expenses from activities that are directly related to the business operations from activities that are not directly tied to the operations. The multi-step income statement categorizes operating and non-operating incomes and expenses. 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. 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.

Real Estate Accounting Software 2025: Top 8 for Your Business

It would be reported in the non-operating and other section because it doesn’t have anything to do with sales. 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.

• A multi-step statement is an income statement prepared to report a company’s sales and revenue, expenses and overall profit or loss for any given period.
• The selling expenses are the costs incurred when selling goods to consumers and may include marketing expenses, the salary of sales personnel, and freight charges.
• Yet, from a practical perspective, the insights that can be obtained from the multi-step income statement are ultimately far more insightful to understand and analyze the financial performance of a company.
• It assists investors and managers in making better decisions on where to invest, how to finance it, and how to efficiently operate the business.
• Unlike the single-step income statement that uses only one accounting equation to compute the net profit, businesses will need to use multiple accounting equations to derive at the bottom line.
• The gross profit and the operating profit figures are calculated in the operating section of a multi-step income statement.

The other core financial statements are the balance sheet and cash flow statement. The income statement shows the total revenue attributable to the primary activities of the business, excluding revenues from non-merchandise-related sales. Investors and creditors can evaluate how well a company performs its main functions separate from any other activities the business is involved in. Investors and creditors want to know how efficiently the retailer sells its merchandise without diluting the numbers with other gains and losses from non-merchandise related sales. 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.

Understanding the Accounting Equation and Formula

The income statement comprehensively overviews a company’s operating income, expenses, and overall financial performance. However, the multi-step income statement divides and categorizes the operating income and expenses into multiple steps, providing a more detailed and clear picture of the company’s financial activities. This approach allows for a more accurate analysis of the company’s profitability and helps identify specific areas where improvements can be made.

• CFI is the global institution behind the financial modeling and valuation analyst FMVA® Designation.
• It is simply Cash Inflow from Merchandise sales and Cash Outflow from purchasing the merchandise.
• It shows the progression from sales revenue to net income by separating operating and non-operating activities.
• The Revenue account shows the revenue generated by normal business activities that includes any deductions and discounts given to customers.
• In preceding chapters, we illustrated the income statement with only two categories—revenues and expenses.

By creating a multi-step income statement, companies can better understand their revenue streams, cost of goods sold, and operating expenses, leading to more informed decision-making and strategic planning. Overall, using the multi-step income statement benefits companies seeking a more detailed and comprehensive overview of their financial performance. It begins with the gross profit calculation, derived by deducting the cost of goods sold from the multiple income statement total revenue.

What Are Operating Costs?

However, in the case of multi step income statement, the company will be able to subdivide its revenue according to the type of sales, such as sales revenue from different products or regions. To add more visibility, expenses can be grouped into costs of sales, selling, general and administrative expenses including wages and rent, and other expenses like interest charges. This way, a multi step income statement will allow the company to determine the level of profitability of each product line, determine where it can cut costs, and measure the overall effectiveness of the business. Going back to our retailer 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.

Include any non-operating income (e.g., interest income, gains from investments) and expenses (e.g., interest expenses, losses from investments) separately in the income statement. This detailed approach helps users understand where a company’s profits are coming from and how different types of activities impact the overall financial performance. A multi-step (or single-step) income statement is one of three core financial statements.

Unlike the single-step income statement that uses only one accounting equation to compute the net profit, businesses will need to use multiple accounting equations to derive at the bottom line. Companies use the multi-step income statement and the balance sheet for financial ratios analysis. Businesses can benchmark performance with other companies in their industry to find comparables for their type of business. An example of a single step income statement is Dana Incorporated’s Consolidated Statement of Operations for the calendar years ended December 31, 2021, 2020, and 2019.

Increase your desired income on your desired schedule by using Taxfyle’s platform to pick up tax filing, consultation, and bookkeeping jobs. When you’re a Pro, you’re able to pick up tax filing, consultation, and bookkeeping jobs on our platform while maintaining your flexibility. Taxes are incredibly complex, so we may not have been able to answer your question in the article. Get $30 off a tax consultation with a licensed CPA or EA, and we’ll be sure to provide you with a robust, bespoke answer to whatever tax problems you may have. Implement our API within your platform to provide your clients with accounting services.

AccountingTools

We’d love to hear your thoughts and experiences using multi step income statements. Feel free to leave comments with your thoughts, questions, or any further information that might be useful. The net profit shows the company’s net profitability after deducting the operating expenses and expenses such as taxes and interest paid on debts. In contrast to a multi-step income statement, the Dana Incorporated income statement is single-step mainly.

Interpreting the net income in a multi-step income statement is essential in evaluating a company’s financial performance. The net income represents the company’s overall profit after accounting for all revenues, expenses, and taxes, clearly indicating the business’s financial health and profitability. A multi step income statement is important because it provides the company, investors, lenders, and other stakeholders deep insight into a company’s financial performance during a period of time and its operating trends.

It also includes extraordinary items of revenues and expenses which are infrequent and unusual such as loss due to natural calamity. 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. This is a key figure for investors, creditors, and internal management because it shows how profitable the company is at selling its goods or making its products.

Because of this greater detail, the multi-step income statement is often used for financial ratio analysis. 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. The multi-step income statement includes multiple subtotals within the income statement.