Question

I am taking an accounting class and we are being asked to comment on discussion question answers that are posted. I need some help responding to this question in a discussion format and I must have a reference. Any help you can give me would be much appreciated!

"The multiple-step income statement has three important line items: gross profit, income from operations, and net income." (Kimmel & Weygandt, 2017). It is important for a company to differentiate their income under these three categories because it gives the most accurate and simple picture of their finances. By first figuring out gross profit it shows how much money a company actually brought in from their net sales once subtracting their cost of goods. Once gross profit is known a business can subtract their operating expenses to determine what is their overall income from operations. Once this is complete, a company will either add or subtract the amount from activities not related to operations. This will then determine their net income. The three step process is further explained as follows:

"1. Subtract cost of goods sold from net sales to determine gross profit.
2. Deduct operating expenses from gross profit to determine income from
operations.
3. Add or subtract the results of activities not related to operations to determine
net income." (Kimmel & Weygandt, 2017).

By breaking out their income statements into this multi-step process it makes it simple for a business to determine their net income after the cost of goods and operating expenses.

Answer 1

Multiple-Step Income Statement

An alternative to the single-step income statement is the multiple-step income statement, because it uses multiple subtractions in computing the net income shown on the bottom line.

The multiple-step profit and loss statement segregates the operating revenues and operating expenses from the nonoperating revenues, nonoperating expenses, gains, and losses. The multiple-step income statement also shows the gross profit (net sales minus the cost of goods sold).

Here is a sample income statement in the multiple-step format:

Using the above multiple-step income statement as an example, we see that there are three steps needed to arrive at the bottom line Net Income:

Step 1.

Cost of goods sold is subtracted from net sales to arrive at the gross profit.

Step 2.

Operating expenses are subtracted from gross profit to arrive at operating income.

Step 3.

The net amount of nonoperating revenues, gains, nonoperating expenses and losses is combined with the operating income to arrive at the net income or net loss.

There are three benefits to using a multiple-step income statement instead of a single-step income statement:

1. The multiple-step income statement clearly states the gross profit amount. Many readers of financial statements monitor a company's gross margin (gross profit as a percentage of net sales). Readers may compare a company's gross margin to its past gross margins and to the gross margins of the industry.

2. The multiple-step income statement presents the subtotal operating income, which indicates the profit earned from the company's primary activities of buying and selling merchandise.

3. The bottom line of a multiple-step income statement reports the net amount for all the items on the income statement. If the net amount is positive, it is labeled as net income. If the net amount is negative, it is labeled as net loss.

How to Prepare a Multi-Step Income Statement

Preparing a multi-step income statement is a more complex process than creating a single-step report. Here are the steps you need to follow to create a multiple-step income statement for your business.

1. SELECT YOUR REPORTING PERIOD

Before you prepare your income statement, you need to select a reporting period. Typically, income statements are prepared monthly, quarterly or annually. Publicly traded corporations are required by law to prepare financial statements both quarterly and annually. Preparing statements every month can help you track how your profits change over time, which is valuable information to have when making financial decisions about your business, like whether to invest in new equipment.

2. CREATE A DOCUMENT HEADER

The header of your multi-step income statement conveys important information to readers. 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.

3. ADD OPERATING REVENUES

The top section of your multi-step income statement covers your total operating activities. First, add your operating revenues, which is the sales revenue generated from selling your goods or services.

4. ADD OPERATING EXPENSES

Next, add your total operating expenses to the operating activities section. This would include cost of goods sold, as well as costs such as advertising expenses, salaries and administrative expenses, including office supplies and rent.

5. CALCULATE GROSS PROFIT

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.

6. CALCULATE OPERATING INCOME

Next, you’ll need to calculate operating income. To do so, subtract your operating expenses from your gross profit. Add the final calculation as a line item at the bottom of your operating activities section, titled Net Operating Income or Income from Operations.

7. ADD NON-OPERATING REVENUES AND EXPENSES

In the bottom section of your income statement, below your operating activities, create a section for your non-operating activities. Add your revenues and expenses from non-operating activities, including interest and the sale or purchase of investments.

8. CALCULATE NET INCOME

The final step in creating a multi-step income statement is calculating net income. To do so, add together your operating income and your non-operating items. Add the total to the bottom of the income statement as Net Income. If it is a positive number, you’re reporting a profit. If the total is a negative number, you’re recording a loss.