A Beginner’s Guide to the Multi-Step Income Statement

Income statements enable you to choose a monthly, quarterly, or yearly income statement period, depending on your needs. Net income, called the bottom line, is included in both income statement formats. Gains or losses are also considered when calculating operating income and net income. PwC refers to the US member firm or one of its subsidiaries what is the order of the subtotals that appear on a​ multi-step income​ statement? or affiliates, and may sometimes refer to the PwC network. This content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors. Comprehensive income includes both net income and other revenue and expense items that are excluded from the net income calculation.

A single-step income statement offers a simplified snapshot of a company’s revenue and expenses. This straightforward document merely conveys a company’s revenue, expenses, and bottom-line net income. All revenues and gains are totaled at the top of the statement, while all expenses and losses are totaled at the bottom. This simplified approach makes record-keeping easier for both the accountantswho prepare the statements and the investors who read them. Shareholders need only focus on the net income figure, to gauge a company’s overall vitality.

Intermediate Accounting

Revenue is recognized in the period it is earned, which may or may not be in the same period as the related cash collection. Recognition of revenue when earned is a fundamental principal of accrual accounting. An accounting standard is a common set of principles, standards, and procedures that define the basis of financial accounting policies and practices. Unlike a single-step format, multi-step formats don’t only focus on net income but offer an additional level of detail by calculating two more income-related figures. Net Income is the income earned after other revenues are added and other expenses are subtracted.

This payment will reduce the company’s cash and its liability to the bank, but it is not an expense. Some expenses are matched against sales on the income statement because there is a cause and effect linkage—the sale of the merchandise caused the cost of goods sold and the sales commission expense. Other expenses are not directly linked to sales and as a result they are matched to the accounting period when they are consumed or used—examples include utilities expense, office salaries expense, and depreciation expense. Some expenses such as advertising expense and research and development expense can neither be linked with sales nor a specific accounting period and as a result, they are reported as expenses as soon as they occur.

Multi-step income statements are worth the effort

Equity analysts are interested in earnings because equity markets often reward relatively high- or low-earnings growth companies with above-average or below-average valuations, respectively. Fixed-income analysts examine the components of income statements, past and projected, for information on companies’ abilities to make promised payments on their debt over the course of the business cycle. Corporate financial announcements frequently emphasize income statements more than the other financial statements. Sole proprietorships, partnerships and other small businesses may use the single-step format, which is easier to prepare. For example, a real estate partnership’s income statement may have just one line for sales commissions, followed by the operating expense items, such as rent, supplies and administrative services.

The multi-step income statement breaks down operating revenues and operating expenses versus non-operating revenues and non-operating expenses. This separates revenues and expenses that are directly related to the business’s operations from those that are not directly tied to its operations. 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.

What is a Multi-Step Income Statement?

It offers an in-depth analysis of the business’s financial performance in a specific reporting period. It lists items in different categories to make it convenient for users of the income statement to better understand the core operations of the business. The multi-step income statement includes multiple subtotals within the income statement.