Just the very sound of the term multi-step income statement suggests a complicated document that includes facts and figures about a business. It’s more inclusive than a single-step income statement, but once you understand what this report really entails, it’s not that daunting. Here is everything you need to know about a multi-step income statement including what it is, how it is useful, and why you might want to have this process in place for your business.
What is a multi-step income statement?
According to the Corporate Finance Institute, a multi-step income statement is an analytical tool that takes an in-depth look at the financial performance of a business within an established reporting period. The purpose of this statement is to help users understand the core business operations of the company and how each is performing. The statement segregates expenses and total revenue into the categories of operating and non-operating. This kind of breakdown helps viewers to better understand how the details fit into the bigger picture.
Understanding the multi-step income statement
A multi-step income statement puts income figures and expenses into separate categories under the headings of operating and non-operating. Under the heading of operating, you will have revenues and expenses that result from the primary activities of the company. Under the nonoperating heading, revenues and expenses not directly related to the primary activities of the company will be listed. It’s a way of breaking down income and expenses into separate categories for a more in-depth analysis.
What does a Multi-step income statement look like?
The statement is broken down into a set of sections.
The first is the Operating Head -Gross Profit.
The gross profit is determined by taking the revenue figure of the total sales and subtracting the cost of the products sold. The balance is the gross profit. This figure is used to show the creditors of a business how profitable the company is, and it confirms the ability to meet debt obligations and pay back outstanding credit due. The gross profit helps investors understand the overall health of the company and the degree of profitability.
Operating Head Selling and Administrative Expenses
The second section under the operating head is Selling and Admin Expenses. These figures include all expenses involved in selling goods to the end receivers. It includes all costs incurred including sales personnel salaries, marketing expenses, freight charges, and any other expenses directly related to the sale of goods. Administrative expenses are determined by listing the indirect costs of selling goods such as rental expenses, administrative staff expenses, and so forth. Selling and administrative expenses are combined, then deducted from the Gross Profit to determine the Operating Income.
The Non-Operating Head
In this section, all business income and expenses are listed. These are items that do not directly relate to principal activities. They are outside of operational incomes and expenses, such as lawsuits, which can result in either income or expense, or any settlements won or lost. This category is for unusual income or expense activities. The operating Income plus non-operating item revenues provide the Net Income figure.
Which businesses need to use the Multi-step income statement?
Fresh Books answers this question by explaining that the businesses that benefit the most from using a multi-step income statement are those that have several different revenue sources. While this lets most small businesses out, some of the medium to small companies may benefit by using this type of statement. Mostly, larger corporations are the ones that benefit the most from this in-depth analytical tool. Those with straightforward operations and accounting would not benefit. The larger and the more complete the company, the more useful this tool is. Usually publicly traded businesses rely on multi-step statements to comply with legal requirements of accounting for more detailed financial reporting.
Multi-step income statement vs a single-step income statement
The Motley Fool explains the difference between the two kinds of statements. Both are useful but in different ways. There are three types of statements that can benefit a business. The income statement is used to measure the performance of a company is the profit and loss statement. It is a simple statement that provides the revenues and expenses of a company for a specified period of time. the single-step income statement is used for smaller businesses because it uses a single type of accounting that lumps together operational with non-operational expenses in a simpler version that does not create the categories of Operating Head and Non-Operating Head. The third type of statement is the multi-step statement, necessary for larger and more complex businesses.
The Multi-step income statement ends up being a simple document to view, but it contains information that gives you a closer look at how the company is doing on a financial level. Since larger companies have more complicated operations, it’s necessary to take a more in-depth look at the activities and further break them down under the operational and non-operational heads to get a closer look at the performance of the company in both aspects. This can help investors to better understand where companies excel in one area, and it can also identify places where performance is not occurring at the full potential. Analysts can use this information to further examine areas where some of the fat can be trimmed from a company. In short, we can best describe the multistep income statement as an analytical tool that is the most suitable for larger companies. If you are the owner of a small straight-forward company, you would likely not have any practical use for this type of accounting. If you are in the accounting profession it’s a tool that you will be asked to develop when working with larger companies that require more intensive examination within their accounting processes.