A multi-step income statement is a financial report that details a company’s revenues and expenses, resulting in net income. Unlike a single-step income statement, it provides a more detailed breakdown of revenues, cost of goods sold (COGS), and operating expenses. This structure helps stakeholders analyze the company’s financial performance more effectively. Here are three practical examples to illustrate how a multi-step income statement is structured and used in different business contexts.
In this example, consider a fictional retail company, “ABC Retail,” that sells clothing and accessories. This example shows how a retail business might present its multi-step income statement.
ABC Retail has the following financial data for the year:
The multi-step income statement for ABC Retail would be:
ABC Retail
Multi-Step Income Statement
For the Year Ended December 31, 2023
Sales Revenue: $500,000
Cost of Goods Sold: ($300,000)
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Gross Profit: $200,000
Operating Expenses:
Selling Expenses: $60,000
Administrative Expenses: $40,000
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Total Operating Expenses: ($100,000)
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Operating Income: $100,000
Other Expenses:
Interest Expense: ($10,000)
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Income Before Tax: $90,000
Income Tax Expense: ($15,000)
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Net Income: $75,000
This example illustrates how gross profit and operating income are calculated, providing insights into profitability before and after operating expenses.
Next, let’s look at a manufacturing company, “XYZ Manufacturing.” This company produces electronic devices and has a different cost structure.
XYZ Manufacturing reports the following financial details:
The multi-step income statement for XYZ Manufacturing is as follows:
XYZ Manufacturing
Multi-Step Income Statement
For the Year Ended December 31, 2023
Sales Revenue: $1,200,000
Cost of Goods Sold: ($800,000)
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Gross Profit: $400,000
Operating Expenses:
Selling Expenses: $150,000
Administrative Expenses: $100,000
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Total Operating Expenses: ($250,000)
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Operating Income: $150,000
Other Expenses:
Interest Expense: ($20,000)
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Income Before Tax: $130,000
Income Tax Expense: ($40,000)
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Net Income: $90,000
In this example, the manufacturing company has a higher cost of goods sold compared to the retail company, showcasing how different industries can affect financial performance metrics.
Finally, let’s examine a service-based company, “123 Consulting,” which provides professional services. This example highlights the absence of COGS and a focus on service revenue.
123 Consulting has the following financial information:
The multi-step income statement for 123 Consulting would look like this:
123 Consulting
Multi-Step Income Statement
For the Year Ended December 31, 2023
Service Revenue: $600,000
Cost of Goods Sold: $0
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Gross Profit: $600,000
Operating Expenses: ($300,000)
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Operating Income: $300,000
Other Expenses:
Interest Expense: ($5,000)
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Income Before Tax: $295,000
Income Tax Expense: ($25,000)
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Net Income: $270,000
This example showcases a service company, emphasizing that they do not have a COGS like retail or manufacturing businesses, which impacts how their income statement is structured.
These examples of multi-step income statements help illustrate the varied approaches businesses can take based on their operational structure and industry. Understanding these differences is crucial for stakeholders analyzing financial performance.