Multi Step Income Statement


After discussing single step income statement, now we will look in to another income statement format called multi step Income Statement. It is a financial report which contains business operations related to sales, cost of goods sold, both operating and non-operating expenses, net income. Student should keep in mind income statement is often called profit and loss account. The contents of this financial report are divided and presented into meaningful sections. Surely contents include revenues, expenses and ultimate results in shape of net income or net loss. In such income statement, incomes and expenses are recorded and shown in separate sections according to their nature and purposes. For example, all receipts to the business are reported separately as main income and other incomes. Similarly, expenses are listed in sub-section like cost of sales, selling, distribution, administrative etc.

Example and Format

From the following example, students would be able to understand this format of multi step income statement.

A Traders
Income Statement
For the Year Ended December 2015
Sales (from main operations)
Less: Cost of sales
Gross Profit
Less: Operating Expenses
  Selling and Distribution
Operating Profit
Non-Operating Incomes and Expenses
  Mark-up received 
  Other Income
  Sundries Charges
Net Income

From the above example format we can see that incomes have been separated and sub-divided into meaningful categories like sales, mark-up received and other incomes. In other words, we can say that incomes have been divided into Operating and Non-Operating categories. Incomes received or earned from main operations of the business have clearly been reported at the top of the financial report (income statement), while incomes earned from sources other than primary activities have been shown separately down in the bottom of income statement under the non-operating activities. Similarly, expenses have also been shown distinctly into separate sections of Operating and Non-Operating.

Elements of Multi Step Income Statement

  1. Sales. the sales shown at the top of the income statement represents income earned from primary activities of the business.
  2. Cost of sales. This represents cost of sales recorded and includes purchases made, freight, direct wages and other expenses/cost which are directly attributable to the sales made or income earned. By looking other way around, we can say that sales are inflows of resources while the cost of sales is an outflow of resources to the business.
  3. Gross Profit. This figure has been arrived at by subtracting the cost of sales from sales made during the year. The volume of Gross profit is thought to be very important by all the investor and stake holders. This addresses the level of profitability of a business’ main operations and shows that how much a business is exceptionally profitable in its main functions.   
  4. Operating expenses. This represents expenses not directly attributable to sales but yet are very important to incur for making the desire level of incomes. In other words, these are in-direct expenses incurred in connection of the sales made during the period. Selling & distribution expenses usually include commissions paid, sales agent remuneration, advertisement & publicity. While the administrative expenses often comprise of salaries of administration, printing, travelling, utilities paid, building rent, communication charges etc. 
  5. Non-operating incomes & expenses. This represents inflows and outflows from all those activities which are not related to the main operations/functions of the business. For example, a pharmaceutical business is not established for earing profits from bank deposits. Therefore, profits earned from bank deposits are recorded as income in the section titling Non-operating incomes & expenses.

Practicality and Helpfulness

This income statement format is helpful for investors, creditors and other stakeholders to evaluate and analyze the performance of business. Its presentation is very much useful to understand the performance of business core functions. The readers of this financial report can easily comprehend that how effectively and efficiently the business has deployed its resources to earn income from main operations and how much those operations happened to be profitable and productive. The results obtained from this report are of profit prospect and used for determining different sort of profitability ratios.

Keep in mind that a multi step income statement produces more useful information than the single step income statement, but yet this information may also be deceptive and ambiguous if the said report is not prepared carefully and meticulously.