Understanding a Multi Step Income Statement with Examples

Hence, the person who wants the data to be presented in this form can also have it. The income statement is one of three key financial statements used by all companies, from small businesses to large corporations. A basic income statement along with your cash flow statement and balance sheet gives you a complete insight into your company’s financial position. A single-step income statement is a method of reporting a business’ financial performance that lists its revenues, expenses, and profit for the period under one single head. The single-step income statement is a simple straightforward document that only provides a snapshot of the company’s revenues, expenses, and profits or losses for the year. Therefore, its application is limited to smaller organizations or for internal management consumption of larger organizations.

To do this, you add together your operating income and your non-operating items. To do this, you subtract the cost of goods sold from the net sales. LegalZoom provides access to independent attorneys and self-service tools. Use of our products and services are governed by ourTerms of Use andPrivacy Policy. Investopedia requires writers to use primary sources to support their work.

Qualitative Analysis of Companies

Contrarily, indirect costs are generalized expenses that go towards a company’s broader infrastructure, and therefore cannot be assigned to the cost of a specific object. Examples of indirect costs include salaries, marketing efforts, research and development, accounting expenses, legal fees, utilities, phone service, and rent. A single-step income statement offers a simplified snapshot of a single-step vs multi-step income statement 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. This simplified approach makes record-keeping easier for both the accountantswho prepare the statements and the investors who read them.

A multiple-step income statement is an income statement with multiple sections, subsections, and subtotals, including gross profit. 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.

Multi-Step Format

A multi-step income statement uses an itemized list of revenues and expenses. It breaks down expenses and revenues that are directly related to the business’s operations versus those that aren’t. Multi-step income statements follow a three-step process to calculate net income. Management accountants use another type of multi step income statement for internal use that separates fixed and variable costs to compute the contribution margin. Contribution margin is used to analyze product revenues and costs.

• It is very popular because it not only shows gross profit but also product vs labor contribution margins and even net income.
• The financial reports prepared using the single-step income statement are crisp and clear about the firm’s profitability.
• The first figure calculated is gross profit, which is determined by subtracting the cost of goods sold from net sales.
• A multiple-step income statement presents two important subtotals before arriving at a company’s net income.
• Lauren Ward is a personal finance expert with nearly a decade of experience writing online content.

In a true single-step income statement with no subtotals, line items for net revenues and costs and expenses are listed with a single total for Net income . Businesses may include a subtotal for Total expenses in a single-step income statement. The single-step income statement is an easy way to see the profit or loss of your business in an easy-to-understand format.

How to Create a Multi-Step Income Statements

A company’s income statement will show the revenues, expenses, and profit or losses in a financial period. The financial period of a company can vary from being monthly, quarterly, or semiannually to even a full year. The detail provided by the multi-step format also can be a drawback. Preparing a multi-step income statement is a more complex and time-consuming process than the preparation of the single-step format. The single-step income statement offers a straightforward accounting of the financial activity of your business. A multi-step (or single-step) income statement is one of three core financial statements.

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