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It’s often said that the devil is in the details, meaning that it’s important to pay attention to the details that matter to your business, including your financial health. Breaking down your income and expenses into separate sections to have a clear picture of your business’s financial performance can be overwhelming. But is there a way to keep up with the constant flow of financial data that you need to categorize?
If you want to address this, the first thing you can do is generate a multi step income statement. This article will explore what it is, how it works, and how you can apply it to benefit your business.
Key takeaways:
- Multi step income statements give a detailed breakdown of how a company’s money moves, splitting it into different parts like sales, costs, and other financial information.
- Such statements are favored by larger businesses with diverse operations and are required for regulatory compliance.
- Multi step income statements have three main parts: revenue operation, non-operation, and gross income.
- Creating a multi step income statement involves gathering financial data, distinguishing between operating and non-operating activities, and calculating key figures like gross profit and net income.
Contents:
1. What is a multi step income statement?
2. What types of businesses use a multiple step income statement?
3. Multi step income statement vs single step income statements
4. What are the key sections of a multi step income statement?
5. Steps to create a multi step income statement
6. Multi step income statement example
7. Creating multi step income statements with accounting software
8. Wrapping up
What is a multi step income statement?
A multiple step income statement is one of the two common types of income statements in financial reporting. The other is the standard single step income statement.
The multi step income statement is a business document that contains information about the revenues, expenses, and net income of a business for a given period, be it a fiscal year or a quarter. It’s usually known as the “Profit and Loss” (P&L) report.
As the name suggests, it’s called “multi step” because it involves breaking all expenses, income, gains, and losses into operating and non-operating categories. This division helps achieve a clear picture of a company’s performance, its ability to generate revenues, and its overall financial health.
Therefore, if you want to get a clear picture of how well the company is performing, then the multi step income statement is where you’ll find all the information.
Did you know? A multi step income statement is one of the statements used in financial modeling, along with the balance sheet and the cash flow statement. Financial modeling entails using forecasts of a particular company’s financial statements. The multi step income statement shows a company’s income and expenses step-by-step and provides insight into where the company makes its money.
A financial analyst also uses these models to predict future earnings and how various decisions may impact the overall profits of the business. It assists investors and managers in making better decisions on where to invest, how to finance it, and how to efficiently operate the business. These models are also used to estimate the valuation of a business and to compare it to others in the same industry.
What types of businesses use a multiple step income statement?
A multi step income statement can be highly useful for many businesses, especially those that are larger in scale and have some complexity in their bookkeeping.
In general, a multiple step income statement becomes especially valuable for companies that:
- Operate in multiple industries like manufacturing, retail, wholesale, and services sectors;
- Have investments;
- Have a high employee count;
- Deal with non-operating income or expenses;
- Engage in complex financial transactions;
- Want to stay compliant with GAAP and other regulations.
The multi step income statement becomes a must-have for those businesses because it provides a better analysis of the company’s financial performance than the single-step income statement.
For instance, if a retail company doesn’t prepare a multi step income statement, their financial report might only show total revenue and total expenses, which would give only the basic profitability. However, in the case of multi step income statement, the company will be able to subdivide its revenue according to the type of sales, such as sales revenue from different products or regions. To add more visibility, expenses can be grouped into costs of sales, selling, general and administrative expenses including wages and rent, and other expenses like interest charges. This way, a multi step income statement will allow the company to determine the level of profitability of each product line, determine where it can cut costs, and measure the overall effectiveness of the business.
Facts about multi step statements worth knowing
- As a publicly traded company, no matter its size, you’ll need to produce detailed and comprehensive reports on your financials. Typically, these reports are a multi step income statement, a cash flow statement, and a balance sheet.
- When applying for a bank loan, you might be required to prepare a multi step income statement. This statement provides additional information on the operating profit which is very useful for the banks to analyze your financial status.
- If you’re preparing the financial document to attract investors or partners, they’ll appreciate your efforts in preparing a multi step income statement instead of a single step income statement.
Multi step income vs single step income statement
A multi-step income statement and a single-step income statement are two different formats for presenting a company’s financial performance, particularly its revenues, expenses, and net income.
Let’s take a look at the distinctions between them. Here’s how they differ:
1. Structure
With a single step statement, all the financial elements—revenues, expenses, gains, and losses—are combined into one comprehensive overview without any further categorization. It’s a simple, straightforward format where everything is grouped together.
On the other hand, a multi step income statement breaks down revenues, expenses, gains, and losses into separate sections. You’ve got one section for operating activities—such as sales, direct costs, and expenses directly linked to running the business. Then, there’s another section for non-operating activities—like investment income, gains or losses from asset sales, and similar items.
2. Applicability
Both types of statements cater to various businesses. Single step statements are suitable for smaller businesses with uncomplicated financial structures. They’re also often used for internal reporting, where a basic overview of financial performance is enough.
On the other hand, as already highlighted, larger corporations with complex operations typically find multi step statements more beneficial. They’re often preferred by publicly traded companies and for external financial reporting purposes.
For example, a small family-owned restaurant may use a single-step income statement to track its revenue from food sales and subtract all expenses (ingredients, utilities, and wages.)
Larger companies will have more layers of complexity. A phone manufacturer that has lots of products, a complicated organizational structure and various sources of income, will typically use a multi step income statement with revenues divided by product categories and regions. They’ll also detail the operating expenses, which include the cost of sales, R&D, and marketing expenses to achieve more visibility.
3. Formulas
Single step income statement
For a single step income statement, the formula to calculate the net income is:
It’s a simple equation where you subtract the total expenses from the total revenue to find the net income.
Multi step income statement
In a multi step income statement, you calculate your gross profit, operating profit, and net profit. Here are 3 key formulas used in a multi step income statement:
- Gross profit:
- Operating income:
- Net income:
Multi step income vs single step income statement comparison table
As you’ve noticed, the formulas feature revenue and net profit. Although people use these two terms interchangeably, they’re not similar. Having high revenue as a financial performance measure may at first seem good but is not the end of the story. Profit is what really shows how well your business can keep going in the long run.
The following table provides a brief overview of the multi step income statement and the single-step income statement.
What are the key sections of a multi step income statement?
A multi step income statement typically consists of three main sections:
- Operating: Focuses on the core business activities.
- Non-operating: Includes items that aren’t part of the company’s main operations.
- Net income: Shows the final profit after all expenses, including taxes imposed.
Each section (commonly known as “head”) of the multi step income statement is made up of specific line items, and it’s organized like this:
1. Operating section
This operating head shows how much money the company makes from its main business activities and how much it spends to produce its goods or services. It helps us understand how well the company is doing in its main operations. Below are typical components of the operating section:
- Sales revenue: The sum of all receipts from the sale of products or services.
- Cost of Goods Sold (COGS): Costs directly linked to the goods sold through production or acquisition of the goods.
- Gross profit: Calculated as Sales Revenue minus COGS. It shows the profit made from sales before other expenses.
- Operating expenses:
- Selling expenses: Costs related to selling the products, like advertising and sales commissions.
- Administrative expenses: General business expenses, such as salaries of office staff, utilities, and rent.
Note: It’s important to separate operating expenses from non-operating expenses in order to determine the net profit from the company’s main business.
2. Non-operating section
Here, we see any extra income or expenses that aren’t directly related to the company’s main business:
- Other revenues and gains: Income from activities not related to core operations, such as interest income or gains from selling assets.
- Other expenses and losses: Costs not directly tied to core business operations, like interest expenses or losses from asset sales.
3. Net income section
This is where we add up everything from the operating and non-operating sections to find out if the company made a profit or experienced a loss overall. It’s like the final report card for the company’s financial health. It includes:
- Income before taxes: The total income from both operating and non-operating activities before taxes.
- Income tax expense: The amount of taxes owed on the pre-tax income.
- Net income: The final profit after subtracting the income tax expense from the income before taxes. This is the bottom line of the income statement.
This detailed approach helps users understand where a company’s profits are coming from and how different types of activities impact the overall financial performance.
Steps to create a multi step income statement
The process of preparing a multi step income statement entails the following steps in order to present a clear picture of the financial position of the business.
- Collect financial data
Gather all the necessary financial information for the reporting period, which could be a quarter or a year. This includes revenue from merchandise, expenses, gains, and losses.
- Differentiating between operating and non-operating activities
Differentiate between operating and non-operating activities. As already highlighted, operating activities are those directly related to the core business operations, such as sales revenue and cost of goods sold. Non-operating activities include interest income, gains/losses from investments, and other incidental revenue or expenses.
- Calculate gross profit
Find the gross profit by subtracting the cost of the products sold from the total revenue. This is the amount of profit generated from activities that are central to the business before adding operating costs.
- Determine operating income
Subtract operating expenses (cost of sales, salaries, rent, and utility bills) from the gross profit to arrive at operating income. Operating income captures the performance of the company in terms of its primary business activities.
- Account for non-operating income and expenses
Include any non-operating income (e.g., interest income, gains from investments) and expenses (e.g., interest expenses, losses from investments) separately in the income statement.
- Calculate net income
Finally, find the net income by adding the operating income to the non-operating income and then deducting the non-operating expenses. Net income is a measure of a company’s total earnings, or profit, after all expenses, revenues, gains, and losses have been taken into consideration.
- Present the statement
Present the multi step income statement in a clear and organized format, typically with revenue sections at the top followed by expense sections. Include subtotals for gross profit, operating income, and net income to provide clarity on the financial performance at different stages of operations.
Multi step income statement example
Let’s take a look at the example. This is how it might present an income statement with the multi step process:
[Company Name]
Multi Step Income Statement
For the Year Ended [Date]
| Category | Amount ($) |
| Operating Revenue: | |
| Sales Revenue | 500,000 |
| Cost of Goods Sold: | |
| Inventory Beginning | 50,000 |
| Purchases | 300,000 |
| Freight-In | 10,000 |
| Total Cost of Goods Sold | 360,000 |
| Gross Profit: | 140,000 |
| Operating Expenses: | |
| Selling Expenses | 20,000 |
| Administrative Expenses | 50,000 |
| Depreciation Expense | 10,000 |
| Total Operating Expenses | 80,000 |
| Operating Income: | 60,000 |
| Non-Operating Income: | |
| Interest Income | 5,000 |
| Non-Operating Expenses: | |
| Interest Expense | 2,000 |
| Net Income Before Taxes: | |
| Income Before Taxes | 63,000 |
| Income Tax Expense: | |
| Income Tax (25%) | 15,750 |
| Net Income: | 47,250 |
This example illustrates how a multi step income statement is organized. It shows the progression from sales revenue to net income by separating operating and non-operating activities.
Creating a multi step income statement with accounting software
Many companies use the multi step income statement as one of their key financial reports. Three of the most popular accounting software solutions – QuickBooks, Xero, and Sage Intacct, all allow for creating multi step income statements. Businesses can control the format of the report, and make sure all the important information is easy to read.
Accounting sync apps help businesses create detailed and accurate P&L reports, and Synder is one of the best tools for this task, as it provides all the necessary financial data.
Synder is a full-featured, easy-to-use ecommerce tool that saves time on accounting by automating the collection and organization of financial data. Here’s how it happens:
- Synder connects to your payment platforms (Stripe, PayPal, Square, etc.), marketplaces (eBay, Etsy, Amazon, Shopify, etc.), and other financial platforms to gather all necessary data.
- Then, it transfers all the financial information to your accounting software (QuickBooks Online, Xero, QuickBooks Desktop, Sage Intact), including sales, fees, discounts, taxes, product, and clients’ info.
- Synder accurately categorizes transactions into the appropriate accounts. With over 30+ platform integrations, it’s convenient if your items have the same names on various platforms. If the product names are slightly different, however,Synder matches product names between your sales platforms and the accounting system.
- Finally, using data from all your sales channels, payment gateways, and accounting software, Synder analyzes your financial data and tracks sales and expenses. The tool assists with making P&Ls and creating balance sheets.
Moreover, with Synder’s customizable rules and adjustable settings, you can set up a constantly working mechanism based on triggers, conditions, and actions to categorize all finance transactions in your accounting system to best suit your business needs.
Synder makes it easier for businesses to manage their day-to-day bookkeeping, maintain accurate and complete financial records, and gain insights into their operations. This helps your business constantly grow and run more efficiently. So, if you’re tired of doing everything manually and chasing down your transactions, give Synder a try. It’ll change the way you do accounting.
Want to give it a try?
Try Synder for yourself by joining today for a 15-day free trial. To learn more about how Synder streamlines P&L generation, attend one of the Weekly Public Demo sessions with the Synder team.
Wrapping up
A multi step income statement provides a more detailed way of presenting the financial activities of a business. It assists you in getting a better understanding of the performance of operations and total revenue. This may take more effort to prepare than a single step statement, but the advantages are numerous:
- It offers a more detailed analysis of the revenues and expenses incurred.
- Facilitates analysis of the company’s various business units.
- Helps evaluate day-to-day operations separately.
- Offers a clearer picture for investors.
- Enables comparison of current and past performance levels.
Synder simplifies the preparation and understanding of multi step income statements. This tool saves time as it collects, sorts and displays information making financial reports easy to prepare and accurate. Produce accurate multi step statements without any manual action involved, to save time and make strategic business decisions.
We’d love to hear your thoughts and experiences using multi step income statements. Feel free to leave comments with your thoughts, questions, or any further information that might be useful.
