On the other hand, a multi-step income statement follows a three-step process to calculate the net income, and it segregates operating incomes and expenses from the non-operating incomes. It separates revenues and expenses from activities that are directly related to the business operations from activities that are not directly tied to the operations. Its structure distinguishes between operational revenue and operating costs and non-operating income and expenses. Multi-step income statements are one of the two ways firms may declare their earnings.

• The report will reflect the breakdown of the company’s revenue and expense accounts into operating and non-operating business activities in every multi-step income statement.
• Include all non-operating revenues and costs, such as interest and the sale or purchase of investments.
• The loss, interest, or gain must be from an unusual item not part of the company’s routine operation for an expense or income to be recognized as non-operating.
• In any case, GAAP gives companies the option of issuing either single-step or multiple-step income statements, depending on how they’re structured.
• For a company that sells goods (merchandise, products) the first subtotal is the amount of gross profit.
• Unlike the single-step income statement that uses only one accounting equation to compute the net profit, businesses will need to use multiple accounting equations to derive at the bottom line.
• Add the final number as a line item under the cost of goods sold and title it Gross Profit.

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Income Statement vs P&L Statement

The summary of closed revenue and expense accounts are added into the equity section of a balance sheet, as the owner’s capital or retained earnings. This is a guide on how to leverage your income statement and gauge the success of your company. Investors and creditors can evaluate how well a company performs its main functions separate from any other activities the business is involved in. Investors and creditors want to know how efficiently the retailer sells its merchandise without diluting the numbers with other gains and losses from non-merchandise related sales. Yet, from a practical perspective, the insights that can be obtained from the multi-step income statement are ultimately far more insightful to understand and analyze the financial performance of a company. Therefore, the net income factors in non-operating items such as interest expense, other non-operating costs such as non-recurring losses from inventory write-downs, and income taxes paid to the government.

Your total operating expenses are subtracted from gross profit, from the previous section, to show operating income. A multi-step income statement breaks down expenses further than a single step by 3 formula steps. Instead of listing and grouping certain items, you see revenue less the largest expenses, helping you arrive at gross profit.

Multi-Step Income Statement Calculation Example

If you have more than a few income streams or a complicated financial landscape, we suggest using multi-step income statements to get a better view of your profits and losses. Income statement reports show financial performance based on revenues, expenses, and net income. By regularly analyzing your income statements, you can find areas of improvement, compare your business against competitors, and gather other key financial insights. It is possible that management could deliberately shift expenses out of the cost of goods sold category and into operating expenses in order to falsely imply an improvement in gross margins. This could be considered a form of financial statement fraud, and can only be perpetrated when the multi-step format is used, since readers are focusing on the content of the presented subtotals. All publicly-traded companies in the U.S. must adhere to Generally Accepted Accounting Principles (GAAP), which are accounting standards issued by the Financial Accounting Standards Board (FASB).

Subtract the cost of items sold from the net sales to arrive at the gross profit. Then, under the cost of goods sold, add the final sum as a line item and call it Gross Profit. An insurance payout paid to the company’s https://www.bookstime.com/articles/percentage-of-completion-method account as settlement proceeds for damage or loss of a company’s asset can also be considered non-operating income. It contains all business earnings and costs unrelated to the company’s primary and core activities.

Components of a Multi-Step Income Statement

Given the gross profit of Apple for each period, the next step is to subtract operating expenses to determine the company’s operating profit in each fiscal year. Starting off, the gross profit is equal to the revenue generated by a company in a pre-defined period how to do a multi step income statement minus its cost of goods sold (COGS), which are the direct costs incurred as part of its core business operations. Add the final calculation as a line item at the bottom of your operating activities section, titled Net Operating Income or Income from Operations.