Prepare the multi step income statement
The income statement for a merchandiser is expanded to include groupings and subheadings necessary to make it easier for investors to read and understand. We will look at the income statement only as the other statements have been discussed previously. Show In preceding chapters, we illustrated the income statement with only two categories—revenues and expenses. In contrast, a multi-step income statement divides both revenues and expenses into operating and nonoperating (other) items. The statement also separates operating expenses into selling and administrative expenses. A multi-step income statement is also called a classified income statement. Watch this video about preparing a multi-step income statement. Come back as many times as you need to practice creating a multi-step income statement: You can view the transcript for “Prepare a Multiple Step Income Statement (Financial Accounting Tutorial #32)” here (opens in new window). The multi-step income statement shows important relationships that help in analyzing how well the company is performing. For example, by deducting COGS from operating revenues, you can determine by what amount sales revenues exceed the COGS. If this margin, called gross margin, is lower than desired, a company may need to increase its selling prices and/or decrease its COGS. The classified income statement subdivides operating expenses into selling and administrative expenses. Thus, statement users can see how much expense is incurred in selling the product and how much in administering the business. Statement users can also make comparisons with other years’ data for the same business and with other businesses. Nonoperating revenues and expenses appear at the bottom of the income statement because they are less significant in assessing the profitability of the business. Management chooses which income statement to present a company’s financial data. This choice may be based either on how their competitors present their data or on the costs associated with assembling the data. The major headings of the classified multi-step income statement are explained below:
For example, here are income statements from The Home Depot, Inc. annual report for the fiscal year ended February 2, 2020: CONSOLIDATED STATEMENTS OF EARNINGSin millions, except per share dataFiscal 2019Fiscal 2018Fiscal 2017Net sales$ 110,225$ 108,203$ 100,904Cost of sales72,65371,04366,548 Gross ProfitSingle line37,572Single line37,160Single line34,356Subcategory, Operating expenses:Single lineSingle lineSingle line Selling, general and administrative19,74019,51317,864 Depreciation and amortization1,9891,8701,811 Impairment loss—247— Total operating expensesSingle line21,729Single line21,630Single line19,675Operating incomeSingle line15,843Single line15,530Single line14,681Subcategory, Interest and other (income) expenses:Single lineSingle lineSingle line Interest and investment income(73)(93)(74) Interest expense1,2011,0511,057 Other—16— Interest and other, netSingle line1,128Single line974Single line983Earnings before provision for income taxesSingle line1,128Single line974Single line983Provision for income taxes3,4733,4355,068Net earningsSingle line$ 11,242Double lineSingle line$ 11,121Double lineSingle line$ 8,630Double line One of the important features of the multiple-step income statement is the sub-total for operating income. Notice that net income is the bottom line but it includes a provision for income taxes and also interest expense. If you were comparing two different companies, one that was capitalized by owner equity, and the other that relied heavily on borrowed money (that incurs interest expense), the subtotal for operating income would give you a figure to compare between the two that is strictly the results of business operations. SummaryTo summarize the important relationships in the income statement of a merchandising firm in equation form:
Each of these relationships is important because of the way it relates to an overall measure of business profitability. For example, a company may produce a high gross margin on sales. However, because of large sales commissions and delivery expenses, the owner(s) may realize only a very small amount of the gross margin as profit. What is the first step in preparing a multiStep 1: Calculating gross profit or gross margin: The first step in a multi-step income statement is calculating gross profit or gross margin. This is done by subtracting the cost of goods sold in the first section of the statement rather than listing it with other expenses.
What goes on a multiple step income statement?When doing a multiple step income statement, one must remember the key elements. They are: Net Sales, Cost of Goods Sold, Gross Profit, Total Operating Expenses, net gain/loss from other activities, Income before taxes, Income tax expense, and Net Income.
What are the 4 steps to prepare an income statement?How to prepare an income statement. Step 1: Print the Trial Balance. ... . Step 2: Determine the Revenue Amount. ... . Step 3: Determine the Cost of Goods Sold Amount. ... . Step 4: Calculate the Gross Margin. ... . Step 5: Determine Operating Expenses. ... . Step 6: Calculate Income. ... . Step 7: Calculate the Income Tax. ... . Step 8: Calculate Net Income.. What are the 3 main parts of a multiple step income statement?The multi-step income statement uses three different accounting formulas to arrive at the net income:. Gross Profit = Net Sales – Cost of Goods Sold. Cost of goods sold is subtracted from net sales. ... . Operating Income = Gross Profit – Operating Expenses. ... . Net Income = Operating Income + Non-operating Items.. |