Hello everyone,
The three line items of the multi stepĀ income statement are gross profit, income from operations, and net income. Income of operations is the main focus. “If a companys operations are strong, it will almost always show a profit at the bottom line, but not all companies with a profitable bottom line have strong operations”(Myaccountingcourse). Also these types of income statementsĀ can be misleading. For example management can artificially improve their profit margins by moving over the cost of goods to operations. The multi stepĀ income statement gives more detail than a single step statement. Also a company can compare trends and find errors with certain exchanges that are in the wrong category.
ErnestĀ
Multi step income statement is divided in three line items. In multi-step income statement separates operating revenue and expenses from non-operating revenue and expenses. Gross profit is calculated by subtracting cost of goods sold from net sales, operating income is calculated by subtracting operating expenses from gross profit, net income is calculated by subtracting non operating income and expenses from operating income. Company can make detail analysis of income with multi step income statement. It makes easier for companies to compare its gross margin with industry standard. Non operating income and expenses are non recurring. In contrast gross profit information plays important role in decision making since it effects long term viability of of business. Therefore multi-step income statement is important to break out its income since single step income statement fails to give information about gross profit and doesn’t separates operating income and non operating income.Ā
Ramona
