In the above example, we follow the periodic format to compute the Cost of Goods Sold. In a perpetual system, the Cost of Goods Sold is added at the time of the transaction instead of using a periodic difference. IDC MarketScape vendor analysis model is designed to provide an overview of the competitive fitness of technology and suppliers in a given market. The research methodology utilizes a rigorous scoring methodology based on both qualitative and quantitative criteria that results in a single graphical illustration of each supplier’s position within a given market.

Step 6: Calculate operating expenses

On this multi-step income statement, the operating expenses are listed as selling, general, and administrative expenses. The third section is the non-operating head, which lists all business incomes and expenses that are not related to the principal activities of the business. An example of a non-operating expense is a lawsuit claim paid by the company as compensation to an aggrieved party after losing in a court case. Also, a non-operating income can be an insurance compensation paid by an insurance firm to the company’s account as settlement proceeds for damage or loss of a company’s asset. The selling and administration expenses from operating activities are captured in the second section of a multi-step income statement. The selling expenses are the costs incurred when selling goods to consumers and may include marketing expenses, the salary of sales personnel, and freight charges.

To compute the operating income, you can follow the accounting equation stated above. In this article, we explain in details the definition of the multi-step income statement with examples, and also explain the type of business that uses the multi-step approach. Accountants can use the contribution margin to analyze the company’s break even point and its margin of safety. Margin of safety is the amount of a company’s profit after subtracting its break-even point. Contribution margin is also used internally to analyze or forecast product profitability for new product feasibility, pricing, and decisions on accepting orders with non-standard pricing.

What is a Multi Step Income Statement?

Administrative expenses are not directly tied to the sale of goods, such as office staff salaries, rent fees, etc. Smaller businesses may use the more simplified single-step income statement, unless otherwise required by their creditors or lenders. Typically, larger companies will use the multi-step income statement as it provides more valuable details to its many investors and lenders. An example of a multi step income statement is Arrow Electronics, Inc.’s Consolidated Statements of Operations for the calendar years ended December 31, 2021, 2020, and 2019.

# 1 – Operating Head – Gross Profit

For public companies, there are strict reporting guidelines established where a single-step format is not even an option. This number is super important because it reflects the actual revenue generation of your company. It’s more accurate than just looking at gross sales since it considers what might reduce the money you keep—like if a customer brings back an item or gets a price cut for some reason. Calculating revenue means looking at both cash coming in and money that might not come in after all. Companies sometimes have to give refunds or discounts, or they deal with products that come back because something was wrong with them.

Everything You Need To Master Financial Modeling

• Understanding your gross profit sets you up for clearer insights later, especially when evaluating other operating expenses down the line.
• You should add the interest income and non-operating gain and subtract the interest expense and income tax expense from operating profit.
• We’ll now move to a modeling exercise, which you can access by filling out the form below.
• Overall, using the multi-step income statement benefits companies seeking a more detailed and comprehensive overview of their financial performance.
• The multi-step income statement calculates gross profit, operating profit, and net income.

The multi-step format also shows gross profit—this is what’s left after you subtract the cost of goods sold from net sales, but before you take out any operating expenses. It’s an important number because it lets us peek at profitability early on in the statement. This split helps anyone reading the statement see how well the core business is doing without getting mixed up with other costs. The single-step income statement skips the calculation of gross profit and operating profit, instead focusing on the bottom line– net income. The multi-step income statement calculates gross profit, operating profit, and net income. Crafting a multi-step income statement involves meticulous attention to detail—a process that segregates sales, costs, and expenses into distinct categories for a nuanced financial analysis.

The multi-step format, with its clear categorization of revenues and expenses, paves the way for strategic business decisions and rigorous financial scrutiny. Management accountants use another type of multi step income statement for internal use that separates fixed and variable costs to compute the contribution margin. Another application for a multiple-step income statement is dividing costs into direct and indirect costs for cost accounting by management accountants. The Gross profit part of a multi step income statement shows Net Revenues (Net Sales and Net Service Revenues) minus Cost of goods sold. The Operating income part lists operating expenses and subtracts them from Gross profit to equal Operating income.

The multi-step income statement is a method of presenting the financial results of a company by segmenting the revenue, costs, and expenses into distinct sections. A multi-step income statement breaks down revenues, expenses, and profits into separate categories. To understand a detailed multi step income statement for financial accounting, consider its formulas for income statement sections.

• A Multi-Step Income Statement is useful for summarizing large amounts of data, while still giving relevant information.
• The selling expenses are the costs incurred when selling goods to consumers and may include marketing expenses, the salary of sales personnel, and freight charges.
• For instance, a retailer is not into the insurance business, and a car hits their store.
• This would include large manufacturing businesses as well as large, complex retailers.
• The single-step income statement is easier to prepare and provides the information you need.

With this separation in financial reporting, you can analyze ongoing business operations separately from non-operating items. The key components of a multi-step income statement include gross profit, operating income, non-operating incomes and expenses, and the final net income. By incorporating these elements, a multi-step income statement offers a more detailed representation of a company’s financial activities, aiding the stakeholders in understanding the financial performance more comprehensively. Gross profit, a fundamental component of the multi-step income statement, is calculated by subtracting the cost of goods sold from the total revenue. This figure represents the profit earned from a multiple-step income statement reports multiple levels of the core business activities, excluding operating expenses. The gain does not relate to the company’s core business activities, so it is listed in the non-operating section of the income statement.