Sign Up for Discounts
This form does not yet contain any fields.

    Home >> Financial Statement Topics

     

    The Multi-Step Income Statement


    The multi-step income statement involves the use of multiple sub-totals within the income statement, which makes it easier for readers to aggregate selected types of information within the report. The usual subtotals are for the gross margin, operating expenses, and other income, which allow readers to determine how much the company earns just from its manufacturing activities (the gross margin), what it spends on supporting operations (the operating expense total) and what component of its results do not relate to its core activities (the other income total).

    Given its higher level of information content, the multi-step format is usually preferred over the single step format (which does not incorporate sub-totals and so can be more difficult to read).

    However, the multi-step approach can still yield misleading results if management alters where expenses are recorded in the statement. For example, an expense may be shifted out of the cost of goods sold area and into the operating expenses area, resulting in a presumed improvement in the gross margin. This is a particularly pernicious problem when multi-step income statements are being compared across multiple periods, and the method of statement compilation is being altered within the presented periods. In this case, a reader might draw incorrect conclusions from the altered presentation of information.

    It is possible that management could deliberately shift expenses out of the cost of goods sold category and into operating expenses in order to falsely imply an improvement in gross margins. This could be considered a form of financial statement fraud, and can only be perpetrated when the multi-step format is used, since readers are focusing on the content of the presented subtotals.

    Here is a sample format for a multi-step income statement:

    Revenues  
    Sales $1,000,000
    Cost of goods sold 350,000
         Gross margin $650,000
       
    Operating Expenses  
    Advertising 30,000
    Depreciation 20,000
    Rent 40,000
    Payroll taxes 28,000
    Salaries and wages 380,000
    Supplies 32,000
    Travel and entertainment 50,000
    Total Operating Expenses $580,000
       
    Other Income  
    Interest expense 25,000
    Interest income (5,000)
         Total other income $20,000
       
    Net Income $50,000


    Related Topics

    Condensed income statement
    Income statement overview
    Single step income statement
    What is a cash basis income statement?
    What is a comparative income statement?
    What is a partial income statement?