A classified income statement is a financial report showing revenues, expenses, and profits, for which there are subtotals of the various revenue and expense classifications. The classified format is used for more complex income statements, to make them easier for users to read.
A classified income statement typically contains three blocks, which are as follows:
- Gross margin section. Subtracts the cost of goods sold from revenue, to arrive at the gross margin. This information is useful for ascertaining the amount of profit generated strictly from the sale of goods and services. The line items usually included in this section are:
- Gross revenue
- Less: Sales discounts and allowances
- Cost of direct materials
- Cost of direct labor
- Cost of factory overhead
- Operating expenses section. Summarizes the cost of all operating expense line items into a subtotal, followed by a profit or loss from operations line item. This information is useful for determining the ability of a business to generate a profit from its core operating activities. The line items usually included in this section are:
- Accounting and legal expense
- Commissions expense
- Compensation and benefits expense
- Insurance expense
- Rent expense
- Supplies expense
- Utilities expense
- Non-operating expenses section. Summarizes all expenses not related to operations. This information adjusts operating income by any additional factors to arrive at net profit or loss for the entire entity. The line items usually included in this section are:
- Gain/loss on sale of assets
- Interest income/expense
A classified income statement organizes information better than a single-step income statement, where revenue and expense line items are simply listed in sequence, with no attempt to present sub-totals.
A classified income statement is also known as a multi-step income statement.