It is used to summarize the information on the income statement, usually aggregating several years of data, or summarizing different levels of detail available in the general ledger. For instance, if your business is charged with 10% of tax expense from a total of $60,000 of net income, thus, your business will have to bear $6,000 of tax expense. There are two methods to calculate the Cost of Good Sold such as by using periodic method or perpetual method. In the above example, we follow the periodic format to compute the Cost of Goods Sold.

• The total operating expense of the business stands at $19,000, and thus to arrive at the operating income, we deduct the operating expense from the gross profit to arrive at a value of $131,000.
• It might have lost money from its operations but had a huge insurance settlement that pushed a profit to the bottom line.
• We will discuss the formula for the same in the following topic of this article.
• Each segment within the step income statement serves a particular function, contributing to a comprehensive evaluation of a company’s financial landscape.
• When calculating gross profit, no other expenditures are included apart from the cash inflow from the sale of goods and cash outflow from the purchase of goods.

You can also include taxes in this section, or if you’re looking to create EBIT (earnings before income taxes), you can create a separate section for taxes. Income statements enable you to choose a monthly, quarterly, or yearly income statement period, depending on your needs. Over 1.8 million professionals use CFI to learn accounting, financial analysis, modeling social media customer service and more. Start with a free account to explore 20+ always-free courses and hundreds of finance templates and cheat sheets. Being able to see the performance in operating items and non-operating items is a benefit if your operating items performed well. With the single-step layout, details are left out of the presentation and calculation of net income.

What Is a Multi-Step Income Statement?

The Multi-Step Income Statement allows for more in-depth analysis compared to a Single-Step Income Statement. It is very popular because it not only shows gross profit but also product vs labor contribution margins and even net income. Multi-step by Sales Contribution Multi-Step Income Statement is used when it is necessary to show the contribution of different products or services from a company’s total revenue.

• The gain may be a one-time item such as a winning lawsuit or insurance settlement.
• Multi-step income statements, on the other hand, use multiple equations to calculate net income.
• The multi-step income statement provides detailed reporting of your company’s revenues and expenses using multiple steps to arrive at net income.
• Single-step or multi-step income statements are available to small enterprises with a simple operational structure, such as sole proprietorships and partnerships.
• It provides a level of granularity that can be particularly useful in sectors where profitability hinges on multiple revenue streams and expense categories.

Our work has been directly cited by organizations including Entrepreneur, Business Insider, Investopedia, Forbes, CNBC, and many others. This team of experts helps Finance Strategists maintain the highest level of accuracy and professionalism possible. Our team of reviewers are established professionals with decades of experience in areas of personal finance and hold many advanced degrees and certifications. 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. Use step one to calculate the Combined Multi-Step Multi-Entity Multi Step Income Statement Combined Operations.

Tools and software for creating multi-step income statements

This would include the costs of selling, advertising, wages, and administrative costs like office supplies and rent. It contains all business earnings and costs unrelated to the company’s primary and core activities. The running expenditures of selling and administration are recorded in the second component of a multi-step income statement. To calculate the gross profit, subtract the cost of goods sold from the net sales. Add the final number as a line item under the cost of goods sold and title it Gross Profit.

Net income

After all operational expenditures have been paid, this is the amount of money the firm generated by selling its products. Subtract the cost of items sold from the net sales to arrive at the gross profit. Then, under the cost of goods sold, add the final sum as a line item and call it Gross Profit. Then, in the operational activities column, add the entire operating expenditures.

Payroll Taxes for an Employer: How Is Payroll Tax Calculated?

All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly. Typically, Multi-Step Income Statements should be prepared and reviewed on a regular basis. This can help ensure that entities are accurately tracking their financial performance and making necessary adjustments to maximize efficiency. My Accounting Course  is a world-class educational resource developed by experts to simplify accounting, finance, & investment analysis topics, so students and professionals can learn and propel their careers.

Single Step vs Multi Step Income Statements

Include all non-operating revenues and costs, such as interest and the sale or purchase of investments. 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.

Step 5. Calculate gross profit/gross margin

Here’s how multi-step income statements work, and how you can use one for your business. Using a multi-step income statement provides the company’s management with more information, as seen in an example. Read our article to learn more about a multi-step income statement, what businesses use it, and other details. You will also find a section called Single-Step vs Multi-Step Income Statement, where you may learn about the differences between these two types of financial statement formats.