An income statement, also called a profit and loss statement, is one of the three most significant financial statements businesses and organizations should prepare as part of financial accounting.
A multi step income statement is one of two types of formats businesses and organizations may use to report their gains and losses. A multi-step income statement aims to report an organization’s profit, losses, expenses, and total profit and loss during a given period.
Compared to a single-step income statement, it’s more complex and detailed. It better shows the business’s net income and overall situation.
Read our article to learn more about a multi-step income statement, what businesses use it, and other details. You will also find a section called Single-Step vs Multi-Step Income Statement, where you may learn about the differences between these two types of financial statement formats.
Understanding a Multi-Step Income Statement
As mentioned, a multi-step statement is a financial report of an organization or business. It is used to determine and display the net income.
A single-step statement requires totaling up gross income and subtracting losses and expenses to get the net income. At the same time, a multi-step statement has two categories.
According to these categories, income, expenses, gains and losses are to be filled separately. The first category is called “operating”, and the second is “non-operating.”
The result of filling out the statement is the same as compared to a single-step statement, and a company gets the net income. But the difference is significant since the company gains more information regarding the financial health of the organization if a multi-step income statement is applied.
A multi-step statement helps management, owners, investors, stakeholders to see if the company is wisely using its resources.
Single Statement vs. Multi-Step Statement: Differences
A single-step statement is a very simple format that requires calculating revenue totals and subtracting expenses and losses totals to get the net income of a company. It’s a go-to option for small businesses since it is easy to prepare and calculate the net income.
However, a single-step statement doesn’t reflect the situation of the business. A more complex option is a multi-step statement. It requires at least three steps to calculate net income. Both formats have several differences. Keep reading to learn more.
Preparation Time and Ease
As mentioned, it’s extremely easy to use the single-step method. The idea is to aim at finding the net income rather than showcase the expenses and gains of a business. It doesn’t take a lot of effort or time to prepare according to the single-step method.
The multi-step statement requires more preparation and calculations. It takes a while to complete the statement, although it guarantees better outcomes. For example, investors and financial institutions that give loans prefer multi-step reporting to analyze the financial health of a company.
The Ability to Calculate Gross Profit
With the single-step method, it’s not possible to calculate the gross income of the company. But the multi-step reporting format allows businesses to learn more about business’s operating capabilities, financial performance, profitability, etc.
Thanks to the multi-step method, management can make sound business decisions. Gross profit focuses solely on sales revenue and the cost of these goods sold. Calculating gross profit reflects the profitability of the main business operation.
Calculating Operating Income
Not available when using the single-step method, but available to calculate as part of a multi-step statement. Operating income provides management with more detailed data about the company’s profitability rather than focusing only on net income.
Why Should a Business Use a Multi-Step Statement?
When owning a small business, for example, a sole proprietorship, it’s not always necessary to use a multi-step method. The situation is similar for freelancers, consultants, or contractors. It’s easier to prepare and submit the required information.
But if a business is growing and the owner plans to expand it, then it could be wiser to use the multi-step reporting format. It’s more beneficial if an owner wants to obtain a loan — investors or financial institutions will request a multi-step statement.
As for other businesses, there are quite a few reasons to start using the multi-step reporting format:
- to calculate gross income;
- to calculate operating and non-operating income;
- to figure out what areas need improvement;
- to get funding from investors or loans from banks.
To sum up everything said, it’s best to use a multi-step reporting method if you want to have a better picture of a financial situation of a company. Investors would like to see it as well to decide whether they want to invest.
What Businesses Use Multi-Step Reporting Format?
If you are still debating whether to report revenues by using a single-step or multi-step reporting format, then keep reading. If a company has a complex structure, performs a lot of activities, and sells different items, then it’s best to use a multi-step type of reporting. For example, when dealing with different sources of revenue.
The list of typical businesses includes the following:
- large manufacturing companies;
- large retailers;
- publicly traded businesses.
In the last case, publicly trading companies are required to create multi-step financial statements by the law. If you are an owner of a small company with just one type of activity or selling a few products, you can feel free to choose a single-step method.
How to Create a Multi-Step Income Statement?
It’s not that difficult to create a multi-step financial report. All you need to do is to follow these steps:
- Define a reporting period, for example, a month, quarter, or year. To choose the period, consider when board meetings take place. It’s a good idea to prepare these statements for board meetings.
- Create a clear heading to the document, for instance, ExampleCompany Income Statement.
- Prepare the operating income section. Operating income is revenue gained directly from selling products or services. To find operating income information, check the business’s accounting system.
- Prepare the non-operating section. Add expenses and gains from non-operating items, including interest and other similar incomes.
- Calculate net income. Add operating income with non-operating items (whether positive or negative). If the result is a positive number, then it reflects the company’s financial health.
Take a look at an example of a typical multi-step financial statement.
Examples of Multi-Step Income Statement
Here is a simple example of applying a multi-step income statement to an ExampleCompany.
- Sales — $2,000,000
- Cost of goods — $1,350,000
- Gross margin — $1,650,000
- Marketing — $50,000
- Depreciation — $40,000
- Rent — $40,000
- Payroll taxes — $58,000
- Salaries and wages — $580,000
- Supplies — $62,000
- Travel and entertainment — $70,000
- Total Operating Expenses — $900,000
- Interest expense — $50,000
- Interest income — $10,000
- Total other income — $40,000
- Net Income — $100,000.
Using a multi-step income statement provides the company’s management with more information, as seen in an example. It shows all expenses and sources of income.
Author: Charles Lutwidge