Multiple Step Income Statement Separation Between Taxes and Continuing Operating Income

A multi step income statement is more detailed than a simple single step income statement. It provides insights that financial statement users need when reading a profit and loss statement prepared using GAAP accounting standards.

• What is a Multi Step Income Statement?
• Understanding a Multi Step Income Statement
• What are the 3 Main Parts of a Multi Step Income Statement?
• Example of a Multi Step Income Statement
• How to Prepare a Multi Step Income Statement
• Single Step vs Multi Step Income Statements
• Example of a Single Step Income Statement
• Importance of Multi Step Income Statement

What is a Multi Step Income Statement?

A multi step income statement is a company's financial statement in a format presenting revenues, costs, and expenses for a specific reporting period. It provides a more detailed breakdown of expenses than a single-step income statement and uses a variety of equations to determine the net income of a business.

The multi step financial statement includes separate sections to list line items and calculate Revenues, Cost of Goods Sold, and Gross profit, Operating expenses, Non-operating expenses, Interest income (expense), Net income before taxes, Income tax expense, and Net income (loss).

Management accountants and financial analysts use other types of multi-step income statements, showing separate sections for fixed and variable costs or direct and indirect costs.

Understanding a Multi Step Income Statement

To understand a detailed multi step income statement for financial accounting, consider its formulas for income statement sections.

5 formulas for preparing a multi step income statement are:

1. Revenues – Cost of goods sold = Gross profit
2. Gross profit – Operating expenses = Operating income (loss)
3. Operating income (loss) – Non-operating expenses, gains, and losses = Net income (loss) before interest and taxes
4. Net income (loss) before interest and taxes –  interest income (expense) = Net income (loss) before taxes
5. Net income (loss) = Net income (loss) before taxes – income tax expense

In a multi step income statement,  business activities are separated into operating activities and non-operating activities. Non-operating items, including non-operating revenues, non-operating expenses, and non-operating gains (losses), are shown separately from operating revenues and operating expenses. With this separation in financial reporting, you can analyze ongoing business operations separately from non-operating items.

A multi step income statement is often used to make GAAP financial statements. This financial report format can be generated automatically by your business accounting software or ERP system. After review and approval by financial management, it can be distributed to authorized internal users.

The Board of Directors will receive a financial statement package, including the (multi-step) income statement, that includes analysis and interpretations of trends by the financial analyst team and the company's CFO.

What are the 3 Main Parts of a Multi Step Income Statement?

The 3 main parts of a multi step Income Statement are:

1. Gross profit
2. Operating income
3. Net income

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 net income line is calculated as Operating income less net Non-operating expenses. Net expenses include gains or losses.

Example of a Multi Step Income Statement

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. It's available as a 10-K company filing in the SEC's EDGAR database dated February 11, 2022.

The Arrow Electronics, Inc. income statement (Consolidated Statements of Operations) shows sections with subtotals for :

• Sales, Cost of sales, and Gross profit
• Operating expenses and Operating income
• Non-operating expenses and gains (losses)
• Income loss before income taxes
• Provision for income taxes
• Consolidated net income (loss)
• Noncontrolling interests
• Net income (loss) attributable to shareholders
• Net income (loss) per share – Basic and Diluted
• Weighted average shares outstanding used in the Basic EPS and Diluted EPS calculations

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How to Prepare a Multi Step Income Statement

How to prepare a multi step income statement in 13 steps:

1. Label the income statement, including the accounting period ended date
2. Create line items for Net Sales Revenues and Cost of goods sold (COGS) by type and Total Revenue and Total Cost of goods sold lines
3. Calculate the subtotal for Gross profit or Gross margin as Revenues – Cost of goods sold
4. List line items for Operating expenses
5. Calculate the subtotal for Total Operating expenses
6. Calculate the subtotal for Operating income as Gross profit – Total Operating expenses
7. List line items for Non-operating expenses and gains (losses) and optionally subtotal Non-operating income
8. Calculate the subtotal for Net income (loss) before interest and taxes
9. Enter line items for interest income and interest  expense
10. Calculate the subtotal for Net income (loss) before taxes
11. Enter a line item for Income tax expense
12. Calculate Net income (loss) as Net income (loss) before taxes – income tax expense
13. Present basic and diluted earnings per share (EPS) and the weighted average number of shares for each calculation

Single Step vs Multi Step Income Statements

Single step vs multi step income statements means the difference between simple and detailed income statements. A multi step income statement includes subtotals for gross profit, operating expenses, and non-operating expenses. 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.

A very small business like a sole proprietorship is more likely to prepare a single step income statement. Many small businesses and larger companies prepare multi-step income statements.

Example of a Single Step Income Statement

An example of a single step income statement is Dana Incorporated's Consolidated Statement of Operations for the calendar years ended December 31, 2021, 2020, and 2019. It's available as a 10-K company filing in the SEC's EDGAR database dated February 23, 2022.

In contrast to a multi-step income statement, the Dana Incorporated income statement is single-step mainly. The income statement doesn't show Gross profit, separate and calculate Total Operating expenses, or calculate Total Operating income.

Below Net sales, Dana lists line items for Costs and expenses, including:

• Cost of sales
• Selling, general, and administrative expenses
• Amortization of intangibles
• Restructuring charges, net

Then the primarily single-step income statement shows line items for:

• Impairment of goodwill
• Pension settlement charges
• Other income (expense), net

Dana does include some subtotals in its income statement for Earnings before interest and income taxes, with the following line items:

• Loss on extinguishment of debt
• Interest income
• Interest expense

A subtotal for Earnings before income taxes is shown next. This line item is followed by:

• Income tax expense (benefit)
• Equity in earnings of affiliates

A total for Net income (loss) is presented next. The following line items (to subtract) noncontrolling interests:

• Less: non-controlling interests net income
• Less: redeemable non-controlling interests net loss

A total for Net income (loss) attributable to the parent company is shown as the bottom line before listing Basic and Diluted earnings per share and the weighted-average common shares outstanding used to compute Basic and Diluted EPS.

In a true single-step income statement with no subtotals, line items for net revenues and costs and expenses are listed with a single total for Net income (loss). Businesses may include a subtotal for Total expenses in a single-step income statement.

Importance of Multi Step Income Statement

A multi step income statement is important because it provides the company, investors, lenders, and other stakeholders deep insight into a company's financial performance during a period of time and its operating trends. These are advantages or pros compared to the single-step income statement format.

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).

A multi-step (or single-step) income statement is one of three core financial statements. The other core financial statements are the balance sheet and cash flow statement.

Companies use the multi-step income statement and the balance sheet for financial ratios analysis. Businesses can benchmark performance with other companies in their industry to find comparables for their type of business.

Management accountants use another type of multi step income statement for internal use that separates fixed and variable costs to compute the contribution margin. Contribution margin is used to analyze product revenues and costs. Another application for a multiple-step income statement is dividing costs into direct and indirect costs for cost accounting by management accountants.

The contribution margin formula or equation for units is:

CM = S – V

where  CM is Contribution margin

S is Selling price per unit

            V is Variable cost per unit

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.

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