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Preparing a Multiple-Step Income Statement ACC/290

Preparing a Multiple-Step Income Statement ACC/290 May 22, 2017 Sharon Powers

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Preparing a Multiple-Step Income Statement ACC/290

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Preparing a Multiple-Step Income Statement Any company must prepare and record income statements. Income statements, along with balance sheets, are the most basic elements required by potential lenders, such as banks, investors, and vendors. All of these potential lenders will use the financial reporting provided by the specific company. “The multiple-step profit and loss statement segregates the operating revenues and operating expenses from the non-operating revenues, non-operating expenses, gains, and losses. The multiple-step income statement also shows the gross profit (net sales minus the cost of goods sold)” ("Income Statement", 2017). Overall, any company must prepare and record income statements and typically companies choose a multiple-step income statement when doing so. An alternative to the single-step income statement, the multiple-step income statement uses multiple subtractions when determining the net income. A multiple-step income statement separates the operating revenues and operating expenses from the non-operating revenues, nonoperating expenses, gains, and losses. In addition, the multiple-step income statement shows the gross profit which is the net sales of a particular company subtracted by the cost of the goods a company sells. When looking at the Simon Company multiple-step income statement, one can see that the first step is to take the cost of goods sold subtracted from the net sales to determine the gross profit. The next step is to subtract the operating expenses from the gross profit to determine the operating income. The third and final step is to combine the net amount of nonoperating revenues, gains, non-operating expenses and losses with the operating income to determine Simon Company’s net income and/or net loss.

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Using a multiple-step income statement can be beneficial to a company and an individual for a number of reasons. One benefit a multiple-step income statement has is that the gross profit amount is clearly stated. When monitoring a company’s financial statements, many individuals monitor a company’s gross margin which is the gross profit as a percentage of net sales. Often the company’s gross margin will be compared to its past gross margins and also compared to the gross margins of the particular industry in which Simon Company may be a part of. Another benefit of using a multiple-step income statement is that a multiple-step income statement presents the subtotal operating income, which indicates the profit earned. Finally, a multiple-step income statement is beneficial to a company due to the statement reporting the net amount for all of the items on the statement. If the net amount is positive it is labeled as net income and if the net amount is negative it is labeled as net loss. A multiple-step income statement includes multiple subtotals throughout the income statement. Due to this, individuals looking at multiple-step income statements have an easier time finding and understanding particular areas of a company’s multiple-step income statement that must be looked at. Typical subtotals included are gross margin, operating expenses, income of different kinds, which in turn allows an individual to determine a company’s gross margin, the operating expense total, and finally the total of any other incomes the company brings in. When using income statements, the multiple-step income statement is typically preferred over the single-step income statement due to the multiple-step income statement providing a lot more information which helps an individual viewing them to have a much better understanding of the company and the margins. Although the multiple-step income statement is typically preferred, the multiple-step income statement can still provide individuals with misleading information and results

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depending on what categories particular expenses are recorded. “For example, an expense may be shifted out of the cost of goods sold area and into the operating expenses area, resulting in a presumed improvement in the gross margin” ("The Multi-Step Income Statement", 2017). When comparing multiple-step income statements across multiple accounting periods, altering the categories in which certain transactions are recorded can cause an individual to form completely wrong conclusions about a company due to the gross margin number being invalid. Finally, a company also has the ability to deliberately move expenses out of the cost of goods sold and into operating expenses in order to falsely report an improvement in a company’s gross margins. Although financial statements can be altered, this could be considered financial statement fraud. Overall, although the multiple-step income statement is typically preferred, the multiple-step income statement can still provide individuals with misleading information and results depending on what categories particular expenses are recorded.

References

Preparing a Multiple-Step Income Statement ACC/290 Income Statement. (2017). Retrieved from https://www.accountingcoach.com/incomestatement/explanation/4 The Multi-Step Income Statement. (2017). Retrieved from http://www.accountingtools.com/multi-step-income-statement Income Statements. (2000). Retrieved from https://www.inc.com/articles/2000/05/18739.html

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