Multiple-Step Income Statement
An alternative to the single-step income statement is the multiple-step income statement. This format explicitly segregates the operating revenues and operating expenses from the non-operating revenues, non-operating expenses, gains, and losses. It also shows the gross profit (net sales minus the cost of goods sold).
An income statement for Gary's Garden Furniture prepared using the multiple-step format would look like the table below. A description of what is occurring at each step follows the table.
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Using the above multiple-step income statement as an example, we see that there are three steps needed to arrive at the bottom line net income.
Step 1 - Cost of goods sold is subtracted from net sales to arrive at the gross profit.
Gross Profit = Net Sales - Cost of Goods Sold
Gross Profit = $350,000 - $125,000 = $225,000
Step 2 - Operating expenses are subtracted from gross profit to arrive at operating income.
Operating Income = Gross Profit - Operating Expenses
Operating Income = $225,000 - $131,000 = $94,000
Step 3 - The net amount of non-operating revenues, gains, and non-operating expenses and losses is combined with the operating income to arrive at the net income or net loss.
Net Income = Operating Income + Non-Operating Items
Net Income = $94,000 + $1,000 = $95,000
There are three benefits in using a multiple-step income statement instead of a single-step income statement.
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1. It is easy to see the Gross Profit
The multiple-step income statement clearly states the gross profit amount. Many readers of financial statements monitor an organization's gross margin (gross profit as a percentage of net sales) and compare it with those of past years and with those of other organizations within the industry.
2. It is easy to see the Operating Profit
The multiple-step income statement presents the subtotal operating income, which indicates the profit earned from the company's primary activities of buying and selling merchandise.
Operating income is the profit that comes from doing what the organization was created to do. This is not the bottom line but it is quite close. It is the final result of its normal activities before unusual non-recurring or financially related items that are often considered incidental to its main purpose.
3. It is easy to see the Net Profit
The bottom line of a multiple-step income statement reports the net amount for all the items on the income statement. If the net amount is positive, it is labeled as 'net income.' If the net amount is negative, it is labeled as 'net loss.'
This Accounting Terminology Checklist outlines the terminology, concepts and conventions that are accepted within the accounting profession.
You may also be interested in:
Income Statement Definition | Income Statement Format | Income Statement Explained | Operating Expenses Definition | Income Statement Ratios | Common-Size Income Statements | Common-Size Analysis | Income Statement Cash Flow.
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