How to Create a Multi-Step Income Statement: A Guide to In-Depth Financial Reporting
Multi-step income statements are one of the two income statement formats businesses can use to report their profits. A multi-step income statement reports a company’s revenues, expenses and overall profit or loss for a specific reporting period. It is a more detailed alternative to the single-step income statement and uses multiple equations to calculate a business’s net income. An income statement, also called a profit and loss statement, is one of three major financial statements that all businesses should prepare as part of their financial accounting, along with a balance sheet and a cash flow statement.
Learn how to create multi-step income statements to provide a detailed report of your financial activity:
NOTE: FreshBooks Support team members are not certified income tax or accounting professionals and cannot provide advice in these areas, outside of supporting questions about FreshBooks. If you need income tax advice please contact an accountant in your area.
What Is a Multi-Step Income Statement?
The multi-step income statement details the gains or losses of a business, in a specific reporting period. It offers an in-depth analysis of a business’s financial performance. Its format separates a company’s operating revenue and operating expenses from its non-operating revenue and non-operating expenses.
By differentiating between a business’s operating and non-operating accounting, the multi-step income statement gives insight into how a company’s primary business activities generate income and affect costs, as compared to the performance of its non-essential activities.
A multi-step income statement also differs from an income statement in the way that it calculates net income. A single-step income statement includes just one calculation to arrive at net income. Multi-step income statements, on the other hand, use multiple equations to calculate net income. In doing so, they also calculate gross profit and operating income, which aren’t included on a single-step income statement. In comparison, a single-step income statement gives a simple record of financial activity.
Multi-Step Income Statement Formulas
There are three formulas you need to use for this method of calculating net income.
- To calculate gross profit on your income statement, you use the formula:
Gross Profit = Net Sales – Cost of Goods Sold
- To calculate operating income, you use the formula:
Operating Income = Gross Profit – Operating Expense
- To calculate net income, you use the formula:
Net Income = Operating Income + Non-Operating Items
What Businesses Use Multi-Step Income Statements?
Generally, businesses that use multi-step income statements are large, complex companies. Most small businesses and sole proprietorships can get by with just a single-step income statement, since their operations and accounting tend to be straightforward.
Companies with many different sources of revenue should create a multi-step income statement. This would include large manufacturing businesses as well as large, complex retailers. Publicly traded companies should also create multi-step income statements, because they’re required by law to disclose more detailed financial reports to show their earnings.
How to Prepare a Multi-Step Income Statement
Preparing a multi-step income statement is a more complex process than creating a single-step report. Here are the steps you need to follow to create a multiple-step income statement for your business.
1. Select Your Reporting Period
Before you prepare your income statement, you need to select a reporting period. Typically, income statements are prepared monthly, quarterly or annually. Publicly traded corporations are required by law to prepare financial statements both quarterly and annually. Preparing statements every month can help you track how your profits change over time, which is valuable information to have when making financial decisions about your business, like whether to invest in new equipment.
2. Create a Document Header
The header of your multi-step income statement conveys important information to readers. It states the name of your company, it identifies the document as an income statement and it defines the reporting period covered by the document.
3. Add Operating Revenues
The top section of your multi-step income statement covers your total operating activities. First, add your operating revenues, which is the sales revenue generated from selling your goods or services.
4. Add Operating Expenses
Next, add your total operating expenses to the operating activities section. This would include cost of goods sold, as well as costs such as advertising expenses, salaries and administrative expenses, including office supplies and rent.
5. Calculate Gross Profit
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.
6. Calculate Operating Income
Next, you’ll need to calculate operating income. To do so, subtract your operating expenses from your gross profit. Add the final calculation as a line item at the bottom of your operating activities section, titled Net Operating Income or Income from Operations.
7. Add Non-Operating Revenues and Expenses
In the bottom section of your income statement, below your operating activities, create a section for your non-operating activities. Add your revenues and expenses from non-operating activities, including interest and the sale or purchase of investments.
8. Calculate Net Income
The final step in creating a multi-step income statement is calculating net income. To do so, add together your operating income and your non-operating items. Add the total to the bottom of the income statement as Net Income. If it is a positive number, you’re reporting a profit. If the total is a negative number, you’re recording a loss.
Multi-Step Income Statement Example
This sample multi-step income statement from Accounting Coach shows the layout of a multi-step income statement with the separation between operating and non-operating activities. It also shows the three equations that calculate net income.