How to Create a Multi-Step Income Statement

A multi-step income statement presents a company’s financial performance over a specific period, typically a quarter or a year, by detailing its revenues and expenses in a categorized format. It is termed “multi-step” because it calculates several intermediate profit figures, offering a granular analysis of operational efficiency and financial health. This detailed breakdown is valuable for internal management and external stakeholders, such as investors and creditors, to assess the company’s earning quality and sustainability.

Understanding the Structure

A multi-step income statement distinguishes itself from a single-step statement by providing a more detailed presentation of a company’s profitability. A single-step statement simply lists all revenues, then all expenses, to arrive at net income, offering a less comprehensive view. The multi-step format, conversely, highlights various levels of profitability, allowing for a deeper understanding of where income is generated and expenses are incurred.

This structure begins by separating operating revenues and expenses from non-operating activities. The first intermediate subtotal is Gross Profit, which reflects the profit generated directly from selling goods or services before considering operating costs. Following this, Operating Income, also known as Income from Operations, provides insight into the profitability derived purely from a company’s core business activities.

Non-Operating Activities, which include revenues and expenses not directly related to the main business operations, are then accounted for. These might encompass interest income or expense, or gains and losses from asset sales. Income Before Tax is subsequently calculated, representing all income before the deduction of income tax expense. The final figure, Net Income, represents the company’s total profit after all expenses, including taxes, have been deducted.

Essential Financial Data for Preparation

Preparing a multi-step income statement requires specific financial data typically sourced from a company’s general ledger or accounting records. This includes Sales Revenue, often referred to as Net Sales, which represents the total revenue generated from the sale of goods or services, less any returns or allowances. Also needed is the Cost of Goods Sold (COGS), which includes the direct costs attributable to the production of the goods sold by a company.

Operating Expenses form another significant category of required data, encompassing costs incurred in running the business that are not directly tied to production. Examples include Selling Expenses, such as marketing and sales salaries, and General and Administrative Expenses, covering office rent, utilities, and administrative salaries. Depreciation and Amortization expenses, which systematically allocate the cost of tangible and intangible assets over their useful lives, are also considered operating expenses.

Non-Operating Revenues and Non-Operating Expenses are essential. Non-operating revenues might include Interest Income or Gains on the Sale of Assets. Conversely, Non-Operating Expenses typically involve Interest Expense or Losses on the Sale of Assets. Finally, the Income Tax Expense, which is the amount of taxes owed on the company’s taxable income, must be determined.

Calculating and Classifying Revenue and Expenses

The calculation of Gross Profit begins by subtracting the Cost of Goods Sold from Net Sales. For example, if a company has Net Sales of $1,000,000 and its Cost of Goods Sold is $400,000, its Gross Profit would be $600,000, representing the profit available to cover operating expenses.

Following Gross Profit, the next step involves classifying and summing all Operating Expenses. These expenses are broadly categorized into Selling Expenses, which include costs like advertising, sales commissions, and delivery expenses, and Administrative Expenses, covering general office salaries, rent for administrative offices, and insurance. Depreciation expense, which systematically spreads the cost of a tangible asset over its useful life, and amortization expense for intangible assets, are also included within operating expenses. For instance, if a company’s total selling expenses are $150,000 and administrative expenses are $100,000, along with $50,000 in depreciation, its total operating expenses would be $300,000.

After totaling operating expenses, Operating Income is calculated by deducting these total operating expenses from Gross Profit. Using the previous example, a Gross Profit of $600,000 minus total operating expenses of $300,000 yields an Operating Income of $300,000. This figure indicates the profitability of the company’s core business activities before considering non-operating items.

The next phase incorporates Non-Operating Activities. Interest Income earned from investments or dividend income from stock holdings are examples of non-operating revenues. Conversely, Interest Expense on debt or losses incurred from the sale of property, plant, and equipment are classified as non-operating expenses. These net non-operating activities are then added to or subtracted from Operating Income.

For instance, if a company has $10,000 in interest income and $25,000 in interest expense, the net non-operating activity is a $15,000 expense. This $15,000 expense is subtracted from the Operating Income of $300,000, resulting in Income Before Tax of $285,000. This subtotal represents all income generated before the deduction of income taxes.

Finally, Income Tax Expense is applied to the Income Before Tax to arrive at Net Income. The federal corporate income tax rate in the United States is a flat 21% of taxable income. If a company’s Income Before Tax is $285,000, the income tax expense would be $59,850 ($285,000 0.21), assuming no other adjustments. Subtracting this tax expense from Income Before Tax yields the Net Income, which in this case would be $225,150, representing the company’s ultimate profit for the period.

Formatting the Statement

A multi-step income statement requires a clear and standardized format. The statement typically begins with a precise title, including the company’s legal name, the designation “Income Statement,” and the specific period covered, such as “For the Year Ended December 31, 20XX.”

The body of the statement starts with Net Sales at the top. Subsequent line items and subtotals are presented in a logical order. Proper use of headings and subheadings, such as “Operating Revenues,” “Cost of Goods Sold,” “Operating Expenses,” and “Other Income and Expenses,” enhances clarity and organizes related accounts.

Indentation is consistently applied to sub-accounts, visually grouping them under their respective main categories. For example, individual operating expenses like “Selling Expenses” and “Administrative Expenses” would be indented under the “Operating Expenses” heading. Each calculated subtotal, including “Gross Profit,” “Operating Income,” “Income Before Tax,” and “Net Income,” is clearly labeled and typically presented with bolding or double underlines to stand out.