For the analysis of the performance of a business, the managers need to dig deeper and go beyond the single-step income statements. The multiple-step income statement serves this purpose rightly and accurately. Although this type of income statement consumes a lot of time and requires detailed financial reporting, it is crucial for the business managers to learn about the key financial reporting of preparing multi-step income statements for analysing the business performance and draw out a comprehensive plan for future growth.
In this blog, we will discuss what a multi-step income statement is and why it is important for financial reporting. Moreover, we will discuss the steps of preparing a multi-level income statement with examples. So, let’s delve deep!
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What is An Income Statement and What are its Different Types?
An income statement, also known as the statement of profit and loss, is prepared by large companies and publicly traded companies to analyse the financial performance every quarter or every year. It is prepared along with the other two financial statements of the balance sheet and cash flow statement.
The income statement covers the details of the sales, revenue, expenses, profit and loss. The profitability of a company is analysed by this statement. However, this income statement is prepared in two ways;
- Single-step income statement
- Multi-step Income Statement
The single-step income statement is used by small business owners, freelancers and contractors to determine the net income. However, the larger companies report their income statement by breaking it down into different steps. A single-step income statement is calculated as:
Net Income = (Revenue + Gains) – (Expenses + Losses)
What is a Multi-Step Income Statement?
A multi-step income statement is a detailed financial report on different types of income. The gross income is not relevant for all types of business decisions. So, different income levels are relevant for different departments of an organisation for efficient working and growth of a business.
Covering the operating and non-operating income and expenses provides an insight into the overall revenue capacity and performance of a company. Moreover, it helps calculate the net income after taking into account multiple equations of income calculations.
On the other hand, the single-step income statement is limited to only one equation of net income and does not include the non-operating income and expenses in its main equation.
What are the Benefits of Using a Multistep Income Statement?
An understanding of the multi-tier income statement is useful only if your business is making progress with growth potential. Moreover, an organisation is large enough to earn its income from multiple sources and operations. So, each source will generate its own income with its own expenses.
So, it is essential if a complex business organisation is preparing a multi-level statement of profit and loss to determine the profitability and to reduce the expenses where needed. A business with an in-depth financial reporting for the purpose of reducing costs or increasing revenues can calculate this to make a decision about this.
If your business is small and does not require a complex operating structure, then you can rely only on the single-level income statement. On the other hand, you need to prepare a statement of profit and loss consisting of multiple levels to obtain a loan from a bank.
Steps to Prepare a Multi-Step Income Statement
Following are the steps to prepare detailed and multiple levels of income statements.
Step 1: Determine the Financial Year
First of all, determine the financial year for which this statement is being prepared.
Step 2: Company Header
The company header consists of the basic information of the company and the financial reporting year.
Step 3: Calculate Operating Revenues
Add all the operating revenues. Operating revenue is defined as the revenue directly earned from the sale of goods and services.
Step 4: Calculate the Operating Expenses
The operating expenses are those expenditures that occurred on the sale of goods, advertising expenses and other administrative expenses. Moreover, it also includes the expense of the office equipment, supplies and rent. Add all of these operating expenses.
Step 5: Determine the Gross Profit
Gross profit is calculated by subtracting the Cost of Goods Sold (COGS) from the net sales. On the other hand, the net sales are calculated by subtracting the returns, discounts and allowances from the total sale.
Gross Profit = Net Sales – Cost of Goods Sold
Step 6: Determine Net Operating Income
Net operating income is calculated after the gross profit has been calculated. For this, subtract the operating expenses from the gross profit and get a number of operating income.
Operating Income = Gross Profit – Operating Expense
Step 7: Calculate Net Income
Finally, calculate the net income by adding all the operating income and the non-operating items. This net income helps determine the profitability of the business.
Net Income = Operating Income + Non-Operating Items
The Bottom Line
The complex organisations have multiple levels of their operations consisting of operating and non-operating revenues and expenditures. So, it is important to calculate them in an income statement. This is done with the help of multiple steps of income statements.
On the other hand, the calculation of gross profit, net operating income and net income help determine the financial strength and performance of a company in a given year. The single-step income statement does not cover the operating and non-operating items separately. The multi-step income statement is a brief financial report that calculates the income in three different stages to provide detailed insights into a company.
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Disclaimer: All the information in this article on how to create a multi-step income statement. A Guide to In-Depth Financial Reporting, including all the texts and graphics, is general in nature. It does not intend to disregard any of the professional advice.