Multi-Step Income Statement

Multi-step income statement is one of the two most commonly used income statement formats, the other being the single-step income statement. Multi-step income statement involves more than one subtraction to arrive at net income and it provides more information than a single-step income statement. The most important of which are the gross profit and the operating profit figures.

Multi-step income statement is divided into two main sections: the operating section and the non-operating sections.

The operating section contains information about revenues and expenses of the principle business activities. The gross profit and the operating profit figures are calculated in the operating section of a multi-step income statement. All operating revenues are grouped at the top of the income statement. The operating expenses are sub-classified into cost of goods sold, selling expenses and administrative expenses.

Selling expenses are those which are incurred directly on making sales. Examples are: sales commissions, sales salaries, advertising expense, delivery expense and depreciation expense of sales equipment. The administrative expenses are those relating to general administrative activities. Examples are: depreciation expense on office building, office salaries, office supplies expense and office utilities expense.

The non-operating section of a multi-step income statement, usually labeled as 'other incomes and expenses' contains those revenues and expenses which are not earned directly through principle business activities but are incidental to them. For example gains/losses on sales of investments or fixed assets, interest revenue/expense etc. It also includes extraordinary items of revenues and expenses which are infrequent and unusual such as loss due to natural calamity.

Format and Example

The following example illustrates the format of a typical multi-step income statement. The calculation steps are clarified via the '+' and '−' symbols on the left of various income and expense items.

Company A
Income Statement
For the Year Ended December 31, 2010
 
Sales Revenue: 
Total Sales$137,460 
− Sales Returns−2,060 
− Sales Discounts−5,190 
Net Sales Revenue$130,210
Less: Cost of Goods Sold: 
Beginning Stock$12,300 
+ Purchases67,310 
+ Freight-In4,450 
− Purchase Discounts−3,900 
− Purchase Returns−1,000 
− Ending Stock−16,170 
Cost of Goods Sold−62,990
Gross Profit$67,220
Operating Expenses 
Selling Expenses: 
Freight-Out$6,150 
Advertising Expense5,790 
Sales Commissions Expense3,470 
Administrative Expenses: 
Office Salaries Expense18,510 
Office Rent Expense14,000 
Office Supplies Expense5,330 
Total Operating Expenses−53,250
Operating Income$13,970
Other Incomes and Expenses: 
Gains on Sale Equipment$2,430 
− Loss on Sales of Investments−1,640 
− Interest Expense−930 
Net Other Incomes and Expenses−140
Net Income$13,830

Written by Irfanullah Jan