At the end of this module

 The learners will prepare an SCI for a merchandising business using the
multistep approach.
Multi-Step Income
Statement
FOR MERCHANDISING BUSINESS
Definition

 Multi-step income statements are one of the two income statement formats businesses
can use to report their profits. A multi-step income statement reports a company’s
revenues, expenses and overall profit or loss for a specific reporting period. It is a more
detailed alternative to the single-step income statement and uses multiple equations to
calculate a business’s net income. An income statement, also called a profit and loss
statement, is one of three major financial statements that all businesses should prepare
as part of their financial accounting, along with a balance sheet and a cash flow
statement. The multi-step income statement details the gains or losses of a business, in
a specific reporting period. It offers an in-depth analysis of a business’s financial
performance. Its format separates a company’s operating revenue and operating
expenses from its non-operating revenue and non-operating expenses.
 By differentiating between a business’s operating and non-operating accounting, the
multi-step income statement gives insight into how a company’s primary business
activities generate income and affect costs, as compared to the performance of its non-
essential activities.
 A multi-step income statement also differs from an income statement in the
way that it calculates net income. A single-step income statement includes
just one calculation to arrive at net income. Multi-step income statements,
on the other hand, use multiple equations to calculate net income. In doing
so, they also calculate gross profit and operating income, which aren’t
included on a single-step income statement. In comparison, a single-step
income statement gives a simple record of financial activity.
MULTI-STEP INCOME STATEMENT
FORMULAS
 There are three formulas you need to use for this method of calculating net
income.
 To calculate gross profit on your income statement, you use the formula:
 Gross Profit = Net Sales – Cost of Goods Sold
 To calculate operating income, you use the formula:
 Operating Income = Gross Profit – Operating Expense
 To calculate net income, you use the formula:
 Net Income = Operating Income + Non-Operating Items
How to Prepare a Multi-Step Income
Statement?
 Preparing a multi-step income statement is a more complex process than creating a
single-step report. Here are the steps you need to follow to create a multiple-step income
statement for your business.
 1.  SELECT YOUR REPORTING PERIOD
 Before you prepare your income statement, you need to select a reporting period.
Typically, income statements are prepared monthly, quarterly or annually. Publicly traded
corporations are required by law to prepare financial statements both quarterly and
annually. Preparing statements every month can help you track how your profits change
over time, which is valuable information to have when making financial decisions about
your business, like whether to invest in new equipment.
 2.  CREATE A DOCUMENT HEADER
 The header of your multi-step income statement conveys important information to
readers. It states the name of your company, it identifies the document as an income
statement and it defines the reporting period covered by the document.
 3.  ADD OPERATING REVENUES
 The top section of your multi-step income statement covers your total operating
activities. First, add your operating revenues, which is the sales revenue
generated from selling your goods or services.
 4.  ADD OPERATING EXPENSES
 Next, add your total operating expenses to the operating activities section. This
would include cost of goods sold, as well as costs such as advertising expenses,
salaries and administrative expenses, including office supplies and rent.
 5.  CALCULATE GROSS PROFIT
 To calculate the gross profit, subtract the cost of goods sold from the net sales.
Add the final number as a line item under the cost of goods sold and title it Gross
Profit.
 6.  CALCULATE OPERATING INCOME
 Next, you’ll need to calculate operating income. To do so, subtract your
operating expenses from your gross profit. Add the final calculation as a line
item at the bottom of your operating activities section, titled Net Operating
Income or Income from Operations.
 7.  ADD NON-OPERATING REVENUES AND EXPENSES
 In the bottom section of your income statement, below your operating
activities, create a section for your non-operating activities. Add your
revenues and expenses from non-operating activities, including interest and
the sale or purchase of investments.
 8.  CALCULATE NET INCOME
 The final step in creating a multi-step income statement is calculating net
income. To do so, add together your operating income and your non-
operating items. Add the total to the bottom of the income statement as Net
Income. If it is a positive number, you’re reporting a profit. If the total is a
negative number, you’re recording a loss.