When making managerial decisions about overhead expenses, sales growth, profitability and a myriad of operational objectives, incomes statement analysis is needed. A high level of detail is useful when reviewing operations, which is why the multi-step income statement is utilized. Expense line items are detailed making it possible to gauge operations effectively.
The multi step income statement lists revenue, COGS, operating expenses, operating income and non-operating expenses. A major feature of the financial statement is a detailed listing of expenses. Sales and cost of goods sold are displayed at the top of the statement, with gross profit listed as a sub-total. Operating and non-operating expenses are listed next in separate sections, with operating income noted as a subtotal. This allows for analysis of the operating expenses of a company, before additional charges are factored into profitability. Net income is listed at the bottom of the statement as a separate subtotal.
Income Statement Preparation
When preparing a multi step statement, the month-end-close process must occur, closing temporary accounts on the trial balance to retained earnings. The income statement should contain subtotals allowing for analysis of operations.
Order of Subtotals:
- Gross Profit
- Total Operating Expenses
- Operating Income
- Total Non-Operating Expenses
- Net Income
Multi Step Income Statement Examples
Complying with financial reporting standards requires the preparation of a balance sheet, income statement, cash flow statement and statement of owners’ equity. The multi step statement is used by public companies when reporting, because the statement displays cost of goods sold, operating expenses and operating income in a manner that allows investors to analyze the operations of a company. Financial accounting and accounting principles give stakeholders detailed information about revenues and expenses, to make effective decisions about return on investment.
Other types of profit and loss statements are often used within a business, for management decision-making and process improvement. Often-times multi step statements are created for different functional departments within an organization, to manage performance based on individual teams. While these reports are used internally, they are rarely seen outside of the organization. Multi step statements can be customized to perform a break-even analysis as well. The multi step statement has variety of uses that management can leverage to gauge profitability to improve operations.
Multi Step vs Single Step Statements
The multi step income statement provides details to support operating and non-operating expenses, while the single step income statement groups all expenses into a single section. It can be difficult to understand where expenses are coming from, when looking at the single step statement. The multi step statement, however, makes expense analysis easier while making it possible to trace cost drivers.
Multi Step Advantages
- Easy to perform root cause analysis
- Quick identification of cost drivers
- Different measures of profitability versus expenses
- Better information for cost optimization initiatives
Multi Step Disadvantages
- More information to shift through
- Distortion of major line items and high-level analysis
- Expense categories that are not material
Financial statements are an integral part of managing a business and giving owners insight into the financial position, stability and profitability of a business. The multi step income statement format is particularly useful in analyzing profitability and making enhancements to operations.