The Revenue account shows the revenue generated by normal business activities that includes any deductions and discounts given to customers. Once the non-operating section is totaled, it is subtracted from or added to the income from operations to compute the net income for the period. 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.
- A multi-step income statement reports much of the same general information included in a single-step income statement, but it uses multiple equations to determine the net income, or profit, of the company.
- Examples of indirect costs include salaries, marketing efforts, research and development, accounting expenses, legal fees, utilities, phone service, and rent.
- 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.
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- 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 its pros and cons.
The gross profit is too separately calculated and shown in such an income statement. Here, we separate operating expenses and operating revenues from non-operating expenses and non-operating revenues separately in different steps. A multi-step income statement will use multiple equations to determine the final net income figure.
List Operating Revenues
The single-step income statement is easier to prepare and provides the information you need. It is a more detailed version of the single-step income statement and can lead to additional insight. On the multi-step income statement, the non-operating sections sits below the operating section. Given its higher level of information content, the multi-step format is usually preferred over the single step format (which does not incorporate sub-totals and so can be more difficult to read). The income statement for a merchandiser is expanded to include groupings and subheadings necessary to make it easier for investors to read and understand. We will look at the income statement only as the other statements have been discussed previously.
Be sure to only include revenue from sales, as any other revenue will be calculated in a later step. However, if your business is in a growth stage, or you’re looking to obtain a bank loan or attract investors, a multi-step income statement provides details that are missing from the single-step income statement. If you’re a sole proprietor, freelancer, or consultant, a single-step income statement is sufficient.
How to Prepare a Multi Step Income Statement
A single-step income statement offers a simplified snapshot of a company’s revenue and expenses. This straightforward document merely conveys a company’s revenue, expenses, and bottom-line net income. All revenues and gains are totaled at the top of the statement, while all expenses and losses are totaled at the bottom.
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. It’s available as a 10-K company filing in the SEC’s EDGAR database dated February 23, 2022. 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. Other income and expenses like interest, lawsuit settlements, extraordinary items, and gains or losses from investments are also listed in this section.
Net Income = Operating Income + Non-operating items
The non-operating and other section lists all business revenues and expenses that don’t relate to the business’ principle activities. If a tree hit the building and the insurance company paid out a small settlement, the income would not be reported with total sales. It would be reported in the non-operating and other section because it doesn’t have anything to do with sales. Gross profit is the first section of a multi-step income statement, and it is obtained by deducting the cost of goods sold from the total sales.
If you’re still struggling to track your business revenues and expenses in multiple ledgers, it may be time to move to accounting software. To see some of the best products available, be sure to check out The Ascent’s average accounts receivable calculation accounting software reviews. 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.
Resources for Your Growing Business
A multi-step income statement will use three formulas to determine the final net income figure. However, the multi-step approach can still yield misleading results if management alters where expenses are recorded in the statement. For example, an expense may be shifted out of the cost of goods sold area and into the operating expenses area, resulting in a presumed improvement in the gross margin. This is a particularly pernicious problem when multi-step income statements are being compared across multiple periods, and the method of statement compilation is being altered within the presented periods. In this case, a reader might draw incorrect conclusions from the altered presentation of information.