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, 2007 Sales $100,000  Cost of Goods Sold     75,000  Gross Profit     25,000  Operating Expenses Selling Expenses Advertising Expense 2,000 Commissions Expense     5,000 7,000  Administrative Expenses Office Supplies Expense 3,500 Office Equipment Expense     2,500      6,000  Total Operating Expenses    13,000  Operating Income     12,000  Non-Operating or Other Interest Revenues 5,000  Gain on Sale of Investments 3,000  Interest Expense (500) Loss from Lawsuit    (1,500) Total Non-Operating      6,000  Net Income $ 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 = Net Sales – Cost of Goods Sold Gross Profit = $100,000 – $75,000 Gross Profit = $25,000

Step 2.

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

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

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.
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.

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