This separates revenues and expenses that are directly related to the business’s operations from those that are not directly tied to its operations. A single-step income statement is a method of reporting a business’ financial performance that lists its revenues, expenses, and profit for the period under one single head. Generally, businesses that use multi-step income statements are large, complex companies. Most small businesses and sole proprietorships can get by with just a single-step income statement, since their operations and accounting tend to be straightforward.

A multiple-step income statement presents two important subtotals before arriving at a company’s net income. For a company that sells goods (merchandise, products) the first subtotal is the amount of gross profit. Another measurement available from the multi-step income statement is operating income. Like gross profit, operating income provides business owners with more detailed information on company profitability rather than focusing solely on net income. One of the biggest differences between a single-step income statement and a multi-step income statement is the ability to calculate gross profit. This metric is important for business owners that need more detailed information on both business profitability and financial performance.

How to prepare an income statement

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 accountants who 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. A multi-step income statement is ideal for large, complex businesses that use a long list of incomes and expenses.

The Ascent is a Motley Fool service that rates and reviews essential products for your everyday money matters. We’re firm believers in the Golden Rule, which is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team. Our goal is to deliver the most understandable and comprehensive explanations of financial topics using simple writing complemented by helpful graphics and animation videos. At Finance Strategists, we partner with financial experts to ensure the accuracy of our financial content. The Multi-Step Income Statement is very efficient when analyzing a company’s performance.

Example Multiple-Step Income Statement

Subtract the cost of goods sold from your sales revenue in order to arrive at your gross profit or gross margin. The next step when preparing a multi-step income statement is to calculate https://personal-accounting.org/multiple-step-vs-single-step-income-statement/ the cost of goods sold. This includes any materials required for manufacturing as well as direct labor costs for employees directly involved in the manufacturing process.

It states the name of your company, it identifies the document as an income statement and it defines the reporting period covered by the document. It can be used to analyze company performance and allow for a more detailed analysis compared to a single-step income statement. Many smaller companies might use this method of presenting their income statement as is simpler and easier to understand.

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Businesses that sell products and services fall into the Multi-Step Income Statement. They would benefit from this type of statement because they can see a more detailed representation of their operations. Our work has been directly cited by organizations including MarketWatch, Bloomberg, Axios, TechCrunch, Forbes, NerdWallet, GreenBiz, Reuters, and many others. The second category relating to expenses will appear right below the revenue category. It does not make a distinction between non-operating expenses, operating expenses, or the cost of goods. Typically, Multi-Step Income Statements should be prepared and reviewed on a regular basis.

• Income statements, also called profit and loss statements, are one of the major financial statements prepared by businesses.
• In doing so, they also calculate gross profit and operating income, which aren’t included on a single-step income statement.
• If a multi step income statement correctly shows the components of Gross profit and separates Operating expenses from Non-operating expenses, accountants can use it to comply with generally accepted accounting principles (GAAP).
• First, add your operating revenues, which is the sales revenue generated from selling your goods or services.
• A single step income statement lists line items for revenues and costs and expenses with no subtotals, reaching a total for net income (loss) as the bottom line.
• This includes any materials required for manufacturing as well as direct labor costs for employees directly involved in the manufacturing process.

If you’re a sole proprietor, freelancer, or consultant, a single-step income statement is sufficient. The single-step income statement is easier to prepare and provides the information you need. On the other hand, the multi-step income statement requires three steps to complete, resulting in more detail about business operations, making it particularly valuable to investors and financial institutions. 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.