A multi-step income statement is a report that shows profitability in a series of steps. The gross margin portion includes the cost of products sold from operational expenditures. This is critical because it allows investors, creditors, and management to assess the sales and purchase the financial statement’s efficiency.

Learn financial statement modeling, DCF, M&A, LBO, Comps and Excel shortcuts. P&L expenses can also be formatted by the nature and the function of the expense. Lastly, anyone can see the non-operating and other sections being subtracted to compute the net income. It may have lost money on operations, but it was able to turn a profit thanks to a large insurance payment.

Operating Income

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. When calculating operating expenses, don’t include any expenses already included in the cost of goods sold, such as direct labor and materials purchased. 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. The single-step income statement is easier to prepare and provides the information you need. Because gross profit focuses only on sales revenue and cost of goods sold, business owners have a better idea about how profitable their core business operation really is.

We will use the same adjusted trial balance information for CBS but will now create a simple income statement. Gross profit is the result of subtracting the cost of providing the company’s goods or services (i.e., cost of goods sold) from the revenues earned by selling these goods or services. Note that any sales discounts and allowances are also subtracted from sales revenues in this section. Multi-step statements provide the detail necessary for analysis and making decisions, both internally by business managers and externally by lenders and investors. It also meets the standards regulators require of publicly traded companies, which must adhere to generally accepted accounting principles, or GAAP. After all sources of income and expenses are tallied, and taxes are deducted, the result is net income or net loss.

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The classified income statement subdivides operating expenses into selling and administrative expenses. Thus, statement users can see how much expense is incurred in selling the product and how much in administering the business. Statement users can also make comparisons with other years’ data for the same business and with other businesses. multi step income statement example Nonoperating revenues and expenses appear at the bottom of the income statement because they are less significant in assessing the profitability of the business. Multi-step income statements typically include subtotals for operating activities and for non-operating activities, or those outside of the business’s primary operations.

• Decide on a reporting periodSomeone must first choose a reporting period before anyone can begin preparing their income statement.
• 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.
• The third and final section, net income, calculates the net income for the period.
• Operating income measures the amount of income from operations excluding all non-operating income and expenses.
• The larger the margin, the more availability the company has to reinvest in their business, pay down debt, and return dividends to shareholders.
• A very small business like a sole proprietorship is more likely to prepare a single step income statement.