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The document discusses the multiple-step income statement format which separates operating revenues/expenses and nonoperating items. It provides an example statement and explains the three steps to arrive at net income: 1) gross profit from sales less cost of goods, 2) operating income from gross profit less expenses, 3) net income from operating income plus nonoperating items.

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Muaiad Alhariri
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20 views2 pages

SEO Best Practices for Document Optimization

The document discusses the multiple-step income statement format which separates operating revenues/expenses and nonoperating items. It provides an example statement and explains the three steps to arrive at net income: 1) gross profit from sales less cost of goods, 2) operating income from gross profit less expenses, 3) net income from operating income plus nonoperating items.

Uploaded by

Muaiad Alhariri
Copyright
© Attribution Non-Commercial (BY-NC)
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd

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:

Sample Products Co. Income Statement For the Five Months Ended May 31, 2010 Sales Cost of Goods Sold Gross Profit Operating Expenses Selling Expenses Advertising Expense Commissions Expense Administrative Expenses Office Supplies Expense Office Equipment Expense Total Operating Expenses Operating Income Non-Operating or Other Interest Revenues Gain on Sale of Investments Interest Expense Loss from Lawsuit Total Non-Operating Net Income $100,000 75,000 25,000

2,000 5,000 3,500 2,500

7,000

6,000 13,000 12,000 5,000 3,000 (500) (1,500) 6,000 $ 18,000

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. Gross Profit = Gross Profit = Gross Profit = Net Sales $100,000 $25,000 Cost of Goods Sold $75,000

Step 2.

Operating expenses are subtracted from gross profit to arrive at operating income. Operating Income = Gross Profit Operating Income = Operating Income = $25,000 $12,000 Operating Expenses $13,000

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. Net Income = Net Income = Net Income = Operating Income $12,000 $18,000 + + Non-Operating Items $6,000

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. [Link] 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.
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