It is one of the two most popular income statement preparation methods. The other method is the single-step income statement. The multi-step format involves more than one subtraction to arrive at the net income or net profit figure. The best thing about this format is that the figures of gross profit and operating profit are also calculated during the process. Another thing that is quite useful when using this format is that it clearly segregates the operating section and non-operating section.
Under this format, we calculate operating profit by subtracting operating expenses from operating revenues and the non-operating profit by subtracting non-operating expenses from non-operating revenues.
Specimen Multi Step Income Statement
ABC Company
Income Statement
For the Year Ended 31st Dec, 2015
| Sales | 2,000,000 |
| Cost of Sales | 700,000 |
| Gross Profit | $1,300,000 |
| Operating Expenses | |
| Entertainment | 100,000 |
| Payroll | 760,000 |
| Rent | 80,000 |
| Advertising | 60,000 |
| Depreciation | 40,000 |
| Supplies | 64,000 |
| Travel & Tourism | 100,000 |
| Total Operating Expenses | $,136,000 |
| Operating Profit | |
| Other Income | |
| Interest Income | 50,000 |
| Interest Expense | (10,000) |
| Total Other Income | $40,000 |
| Net Income | 176,000 |
Example
KTP is a well-known brand in the South Asian region for selling high-quality smart mobile phones. Within a short period of time, it has acquired a large customer base and is given a very tough time to the world’s most popular brand in South Asian countries. KTP imports all its components and parts from various suppliers and then assembles them to make the complete mobile phone. The financial analysts think that the reason behind the rapid growth of the KTP is not other than heavy marketing. KTP has incurred a heavy amount over the promotion of each of its mobile phones using top-class celebrities in the showbiz industry. Following is the trial balance of KTP for the year ended 31st December 2017:
KPT
Trial Balance
For the Period Ended 31st December 2017
| Account | Debit | Credit |
| Sales revenue | 600,000 | |
| Purchases | 240,000 | |
| Debtors | 180,000 | |
| Creditors | 39,000 | |
| Freehold premises | 144,000 | |
| Property, Plant & Equipment | 210,000 | |
| Payroll | 30,000 | |
| Printing & Stationary | 2,400 | |
| Bad debts | 3,000 | |
| Cash at bank | 18,000 | |
| Cash in hand | 1500 | |
| Insurance expense | 3,000 | |
| Capital | 253,000 | |
| Opening stock | 60,100 | |
| Total | 892,000 | 831,900 |
Adjustments:
Closing stock is $90,000.
Depreciation is to be charged at 10{1bb28fb76c3d282be6cfd0391ccf1d9529baae691cd895e2d45215811b51644c} on Property, plant & equipment.
Required:
Prepare a multi-step income statement for KTP for the year ended 31st December 2016.
Solution
KTP
Income Statement
For the Year Ended 31st December 2016
| $ | $ | |
| Sales revenue | 600,000 | |
| Cost of goods sold | ||
| Opening stock | 60,100 | |
| Add: Purchases | 240,000 | |
| Less: Closing stock | (90,000) | |
| Gross profit | 210,100 | |
| Operating expenses | ||
| Depreciation expense ( 210,000 x 10 {1bb28fb76c3d282be6cfd0391ccf1d9529baae691cd895e2d45215811b51644c} ) | 21,000 | |
| Payroll expense | 30,000 | |
| Printing & stationary | 2,400 | |
| Bad debts | 3,000 | |
| Insurance expense | 3,000 | |
| (59,400) | ||
| Net profit | 150,700 |
As you can see, we have prepared an income statement by a multi-step process. First, we calculate gross profit and then subtracted operating expenses from the gross profit figure to arrive at the net profit figure. A multi-step income statement is a valuable report for the management in making the right decisions as compared to the single-step income statement where everything is grouped together to calculate the net profit figure.