Non-operating activities can include a range of things, from interest income on investments to a gain on an asset sale to costs for settling litigation or shutting an inefficient factory. Create a segment for the non-operating operations in the bottom area of the income statement, below the operational activities. Include all non-operating revenues and costs, such as interest and the sale or purchase of investments. Also, its compulsory for publicly traded companies to prepare the multi-step income statements based on the government’s requirements for statutory compliance. The single-step income statement skips the calculation of gross profit and operating profit, instead focusing on the bottom line- net income. The multi-step income statement calculates gross profit, operating profit, and net income.

This would include the costs of selling, advertising, wages, and administrative costs like office supplies and rent. Decide on a reporting period
Someone must first choose a reporting period before anyone can begin preparing their income statement. Investors use gross profit to evaluate the profitability of core business operations and the company’s overall health. It is a more sophisticated version of the single-step income statement that calculates a company’s net income using numerous equations. Each of these relationships is important because of the way it relates to an overall measure of business profitability. However, because of large sales commissions and delivery expenses, the owner(s) may realize only a very small amount of the gross margin as profit.

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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. In both income statement formats, revenues are always presented before expenses. A Multi-Step Income Statement can be used to analyze company performance and allow for a more detailed analysis compared to a single-step income statement. Calculating net income is the final stage in constructing a multi-step income statement. A multi-step income statement is more difficult to prepare than a single-step income statement.

The net profit shows the company’s net profitability after deducting the operating expenses and expenses such as taxes and interest paid on debts. At the top section of this income statement, to compute the gross margin, subtract the cost of good from the net sales. For instance, the gross margin of XYZ Company is a total of $340,000 ($490,000 – $150,000). 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. If you're a sole proprietor or independent contractor, you can certainly get by using a single-step income statement.

Types of Businesses that Use a Multi-Step Income Statement

You can also include taxes in this section, or if you're looking to create EBIT (earnings before income taxes), you can create a separate section for taxes. Multi-Step Income Statements are useful for clarity and ease of reporting information at different levels. It is used by summarizing the aspects that are important to each organization or purpose for producing a Multi-Level Income Statement. Shopify Balance is a free financial account that lets you manage your business's money from Shopify admin.

Readers will get vital information from the heading of the multi-step revenue statement. It contains someone’s company’s name, identifies the document as an income statement, and specifies the reporting period that the document covers. Here the operating income obtained is added to the non-operating expense, revenue, gains, and losses, where the final resultant is the net income for the period. By adding the operating income and non-operating income, you should be able to compute multistep income statement example the company’s bottom line after deducting the income tax expense. 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 Board of Directors will receive a financial statement package, including the (multi-step) income statement, that includes analysis and interpretations of trends by the financial analyst team and the company's CFO.

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The expenditures paid while selling items to customers are known as selling expenses, including marketing expenses, sales, people’s salaries, and freight charges. We subtract the cost of goods sold from the net sales to arrive at the gross profit number. Moving forward, you should be able to compute the company’s Net Income before tax by adding the sum of operating income with non-operating income. The Revenue account shows the revenue generated by normal business activities that includes any deductions and discounts given to customers.

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Income Statement Example

The selling and administrative expense sections are added together to compute the total operating expenses. This total expense line is subtracted from the gross profit computed in the first section to arrive at the company's operating income. An example of the multi-step income statement is attached as an Excel file where we start with the sales turnover of $200,000 and arrive at a gross profit of $150,000 by deducting the cost of gold sold off the value of $50,000.