Multi-step Income Statement Explained

Overview

• Multi-step income statement provides a structured approach to calculating net income.
• It separates operating and non-operating activities for clearer financial performance analysis.

Structure of a Multi-step Income Statement

1. Sales Revenue
   • Start with total sales revenue.
   • Subtract sales discounts and returns to get net sales.
2. Cost of Goods Sold (COGS)
   • Subtract COGS from net sales to calculate gross profit.
3. Gross Profit
   • Represents the profit from core business activities.
4. Operating Expenses
   • Deduct operating expenses (e.g., payroll, rent, utilities) from gross profit.
   • This results in income from operations.
5. Non-operating Activities
   • Include items like interest revenue, gains or losses from asset sales.
   • Calculate income before income taxes by adding/subtracting non-operating activities.
6. Income Tax Expense
   • Subtract income tax expense from income before income taxes to find net income.

Key Concepts

• Gross Profit: Sales revenue minus COGS.
• Operating Expenses: Costs necessary to run the business excluding COGS.
• Income from Operations: Gross profit minus operating expenses.
• Non-operating Activities: Activities like interest revenue that are outside core business operations.
• Net Income: Final amount after accounting for all revenues and expenses, including taxes.

Example Calculation

Cool Corp Example

• Sales Revenue: $443,000
• Sales Discounts: $23,000
  • Net Sales = $420,000
• COGS: $136,000
  • Gross Profit = $284,000
• Operating Expenses:
  • Payroll: $75,000
  • Rent: $36,000
  • General & Administrative: $58,000
  • Total Operating Expenses = $169,000
• Income from Operations: $115,000
• Non-operating Activities:
  • Gain on Sale of Land: $9,000
  • Interest Expense: $4,000
  • Income Before Taxes = $120,000
• Income Tax Expense: 40% of income before taxes = $48,000
• Net Income: $72,000

Importance

• Provides a detailed view of a company's financial performance.
• Helps stakeholders understand different aspects of profitability.
• Separates core business activities from incidental financial activities.

Summary

• The multi-step income statement is a valuable tool for providing a detailed financial overview by categorizing various aspects of income and expenses.
• Key subtotals such as gross profit, income from operations, and net income help in understanding different elements of a company's profitability.