Multi-Step Income Statement

Written by True Tamplin, BSc, CEPF® | Reviewed by Editorial Team

Updated on December 21, 2022

A Multi-Step Income Statement is a financial statement that includes more than one step. It is used to summarize the information on the income statement, usually aggregating several years of data, or summarizing different levels of detail available in the general ledger.  Moreover, it also helps show how certain line items relate to each other.

Multi-Step Income Statements are also referred to as Multi-Step Statements, Multi-Level Income Statements, Multi-Tiered Income Statement, and Multi-Tiered Reporting.

Why Should You Use One in Your Financial Analysis?

Multi-Step Income Statements are useful for clarity and ease of reporting information at different levels. It is used by summarizing the aspects that are important to each organization or purpose for producing a Multi-Level Income Statement. It makes it easier to report complex information while being more comprehensive than single-step statements. Multi-level income statements are also often produced in compliance with some laws and regulations. 

Types of Multi-Step Income Statement

There are three main Multi-Step Income Statement types: Multi-step Income Statement By Time, Multi-step Income Statement by Sales Contribution, Multi-step Multi-entity Income Statement. 

Multi-Step Income Statement by Time

There are two main categories of Multi-Steps by Time: Single Column Multi-Step, Multi-Column Multi-Step.

  • Single Column Multi-Steps - This is used when all the Multi-Step income statements are built using one period. 
  • Multi-Column Multi-Steps - This is used when several periods of financial data are combined in the Multi-Level Income Statement. 

Multi-Step Income Statement by Sales Contribution 

A Multi-Step by Sales Contribution is a Multi-Step Income Statement that groups transactions into categories based on the percent contribution to total sales for each category. 

Multi-step by Sales Contribution Multi-Step Income Statement is used when it is necessary to show the contribution of different products or services from a company's total revenue. 

Multi-Step Multi-Entity Income Statement

There are three main Multi-Step Multi-Entity Income Statements: Multi-Step Multi-Entity Statement by Parent Company, Multi-Step Multi-Entity Statement by Subsidiary, Multi-Step Multi-Entity Statement by Combined Operations. 

  • Multi-Step Multi-Entity Statement by Parent Company - This is used when an entity has only one parent company, and the Multi-Step Multi-Entity Statement is built using only one period. 
  • Multi-Step Multi-Entity Statement by Subsidiary - This type of Multi-Step Income Statement is used when a Multi-Step Multi-Entity Statement has more than one subsidiary, and each Multi-Level Income Statement uses different periods. 
  • Multi-Step Multi-Entity Statement by Combined Operations - This is used when the Multi-Level income statement uses combined operations, and each Multi-Level Income Statement uses different periods. 

Multi-Step Income Statement vs Single-Step Income Statement

The Multi-Step Income Statement is more comprehensive and easier to understand. It can be used to compare more of the company's products and services at once. A Multi-Step Income Statement is useful for summarizing large amounts of data, while still giving relevant information. 

On the other hand, Single-Step Income Statements are typically used when there is only one product or service available. It can be used to break down expenses by department or object, however, Multi-Step Income Statements are more commonly used. 

How to Create a Multi-Step Income Statements

To create a Multi-Step Income Statement, the following steps should be followed:

Step 1: Calculating Gross Profit or Gross Margin

The first step is to calculate gross profit. This is done by subtracting the cost of goods sold from revenue. Calculating Gross Profit or Gross Margin

Step 2: Calculating Operating Income

Subtract operating expenses from a Multi-Step Income Statement Operating expenses are expenses that relate to the main income statement, and they include items such as general administrative costs, selling, and distribution expenses. Calculating Operating Income

Step 3: Calculating Pretax Income or Pre-Tax Earnings

Subtract income taxes from the Multi-Step Income Statement. Income taxes are paid by the company on its taxable income, which is calculated by subtracting deductions (such as business expenses, interest payments, and donations) from revenue. Calculating Pretax Income or Pre-Tax Earnings 

Step 4: Calculating Multi-Step Multi-Entity Statement by Parent Company or Multi Level Multi-Entity Statements by Subsidiary (This Is Dependent on Your Report)

Using the Multi-Step Multi-Entity Statement by Parent Company or Multi-Level Multi-Entity Statements by Subsidiary. Use step one to calculate the Multi-Step Multi-Entity Statement by Parent Company or Multi-Level Multi-Entity Statements by Subsidiary.

Step 5: Calculating Combined Operations

Using the Multi Step Income Statement Combined Operations, use Multi-Step Multi-Entity Statement by Parent Company or Multi-Level Multi-Entity Statements by Subsidiary. Use step one to calculate the Combined Multi-Step Multi-Entity Multi Step Income Statement Combined Operations.

Step 6: Calculate Net Income

Net Income is calculated by adding items that are not included in Multi-Step Multi-Entity Statement By Parent Company or Multi-level Multi-Entity Statements by the Subsidiary, such as extraordinary items and discontinued operations. Calculate Net Income

Benefits and Drawbacks of a Multi-Step Income Statement

Benefits of a Multi-Step Income Statement

The Multi-Step Income Statement is very efficient when analyzing a company's performance. 

  • A Multi-Step Income Statement allows for more in-depth analysis compared to a Single-Step Income Statement. 
  • When a Multi-Step Income Statement is used to compare multiple company's products and services it becomes easier to identify the best-performing product or service.

Drawbacks of a Multi-Step Income Statement

  • It is more time-consuming than Single-Step income statements. 
  • Very complicated, making it difficult to get information from. 
  • It requires extensive data to construct.
  • There are more opportunities for human error because of the lengthy process.

The Bottom Line

The Multi-Step Income Statement is a useful multi-step financial statement. It can be used to analyze company performance and allow for a more detailed analysis compared to a single-step income statement.

Multi-Step Income Statements take more time than single-step income statements, however, they give the company evaluating them an advantage when it comes to finding trends in the data being represented. 

 

Multi-Step Income Statement FAQs

What is a Multi-step income statement?

A Multi-Step Income Statement can be defined as an income statement that breaks down the steps required to calculate net income. It is more detailed compared to a typical single-step income statement.

Why should you use one in your financial analysis?

The Multi-Step Income Statement allows for more in-depth analysis compared to a Single-Step Income Statement. It is very popular because it not only shows gross profit but also product vs labor contribution margins and even net income.

Types of businesses that would benefit from using this type of report

Businesses that sell products and services fall into the Multi-Step Income Statement. They would benefit from this type of statement because they can see a more detailed representation of their operations.

Examples of how to use the information provided by the Multi-Step Income Statement

A Multi-Step Income Statement can be used to analyze company performance and allow for a more detailed analysis compared to a single-step income statement.

About the Author

True Tamplin, BSc, CEPF®

True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.

True is a Certified Educator in Personal Finance (CEPF®), author of The Handy Financial Ratios Guide, a member of the Society for Advancing Business Editing and Writing, contributes to his financial education site, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University, where he received a bachelor of science in business and data analytics.

To learn more about True, visit his personal website, view his author profile on Amazon, or check out his speaker profile on the CFA Institute website.

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