Financial Accounting

Learn the toughest concepts covered in your Financial Accounting class with step-by-step video tutorials and practice problems.

4. Merchandising Operations

Multi-step Income Statement

A multi-step income statement shows important sub-totals on its way to Net Income.



Multi-step Income Statement

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So now let's see the income statement using the multi step income statement format. So the multi step income format income statement format, it's gonna show a few sub totals, it's gonna show some sub totals on our way down to net income. Okay. So it's not just gonna be all our revenues minus all our expenses in any arbitrary order. We're gonna have a specific order that we want to show this stuff. So shows a few sub totals before arriving at net income. Okay? And before we dive into all this, let's look at the bottom of the page, I have an example of what a multi step income statement might look like. Notice we still start with sales at the top, that's our revenue. And then we're gonna start decreasing by different expenses. Maybe other revenues might show later on. But our main revenue or sales revenue stuff is gonna go at the very top still. Right? And we're gonna have these where you see like this gross profit, we're gonna talk about what gross profit is and then we're gonna have this income from operations, right income before income taxes, take out income taxes and then arrive at net income. Alright. So we're gonna go through and see how we get from our top from our sales down to net income in this multi step. So let's go step by step here for all these multi steps. Alright. So first thing we're gonna do is we're gonna calculate gross profit, we're gonna show our sales at the top our sales revenue and we're gonna subtract from sales revenue, the cogs, the cost of goods sold. Okay, so gross profit. This is like the core of our business. If we're thinking about a merchandizing business, a business that sells T shirts, this is gonna tell us the profit from that core business, right? We brought in this much money from selling t shirts and it cost us this much money to buy those t shirts. Right? So this gross profit is just that core core business. And then we're gonna take out our operating expenses. Because if you have a T shirt business, well, it's not so simple of just having a box of T shirts and just selling them, right? You're gonna have expenses for your employees, for the, you know, the warehouse, the storefront, all these things are going to cost money, but it's not that core business. Right? So these are the other expenses that are super necessary to run the business. These are gonna be our operating expenses and these are necessary in the regular course of business. Okay, so inside of operating expenses, here are some examples, you'll see, like payroll for employees, selling expenses for actually selling the goods, general and administrative expenses, rent on the office, you know, general expenses, the phone bills, all sorts of things that you need to run the business and then rent expense, obviously, the rent on the facility. Okay, So we're gonna have all these operating expenses and we're gonna show them all, we're gonna show the categories of operating expenses. And then we're gonna get to another sub total here, it's gonna be the gross profit. Okay, so remember this gross profit is already a sub total, right? We we had taken our revenue, our sales revenue minus our cogs to get to gross profit. And then from gross profit, we're gonna subtract our operating expenses and that's gonna get us to this income from operations. Okay, So income from operations, this is a good number for our for again, our core business, but now it includes those other essential costs, right? Where gross profit was just the focus of the T shirt, selling, right, buying and selling T shirts. Now, it's the actual operation of the business. And then after we get income from operations, we're gonna show all our non operating stuff, right? The business is gonna go through some things, you know, maybe we sell old machinery, that's not the core of our business, but it is a transaction that comes up in business. It's not an operating thing. Alright, So it doesn't come up from operating. So, let's see what some of these non operating activities could be. We could get revenues. Right? So this is another place that where we might see revenues, it's not just at the very top, the very top is showing our core business revenues, like sales of the t shirts or whatever, where we might see some other revenues that we might get just, that can happen happen to come about and we'll see expenses and losses here as well. But remember, these are not in the ordinary course of business. So the first one would be interest revenue is what we call non operating. So if we're, you know, loaning money out or something like that and we get some interest, well, we're not, we're not a bank, right? We're a T shirt company, but we're earning some interest on the side because we had some extra cash, we made alone, whatever it might be. Um we're allowed to do that, right? It's just not our core business. So it would be here in the non operating activities and that would be, you know, interest revenue or dividend revenue, right, dividend revenue would be a situation where, let's say we bought, I don't know, stock in Apple. Apple company. Apple corporation, right? And then Apple pays a dividend. Well, we, the company owns some of that stock, so they have rights to that dividend. That's revenue to the company. But we're not like an investment bank, right? Our business is not earning dividends. Are businesses buying and selling t shirts in this example? Um So that dividend revenue, even though it brought in some money, it's non operating, same goes with rent revenue, right? We're not in the business of being a rental company, but maybe we sublease part of our store to another company or whatever it might be, we could earn some rent. Okay, we'll also see it here. Something called a gain or a loss. Okay. I want to separate the idea of a revenue from a gain or a loss. A gain or a loss usually comes up as a net amount after a sale. So let's say you had some old machinery that was still on your books. And let's say it had a value on your books of 10,000. And you sold that machinery for 20,000. Well, in this case you don't have a revenue of 20,000. We're gonna say you have a gain of the 10,000 that you earned right? The 10,000 extra would be a gain. Okay, so we'll talk about gains and losses a little more later in the course. But this is where they would show up their non operating right in that case, where we're selling machinery were not in the business of buying and selling machinery. It just comes about every now and then. Okay. Non operating. So yeah, like I said, this would come from like selling old equipment, may be selling an investment, anything like that. Alright, interest expense. So when we pay interest on a bank loan, this is another non operating activity. And other losses. We might have some other losses here from an employee. Strike those things aren't gonna come up very often at all. Okay, so there you go. Non operating activities. So finally, we get to our next sub total the income before income taxes notice the income tax expense has not shown up anywhere yet, income tax expense is always the last expense at the bottom. So we have income before income taxes and that's going to be our income from operations. So our last sub total, right, we have income from operations up here, income from operations and I'm gonna put income from ops to to make it fit in that in that spot. Income from operations minus are non operating activity. This gets us to this last sub total which is income before income taxes. And then we're gonna take our income tax expense. So we're gonna have our income before income taxes and then we're gonna subtract the income tax expense and that's the final one. Everything has been accounted for. Now. We've gotten all our expenses in there. Um all our revenues are in there. So we're now at net income, that is our final balance at the bottom. Okay, so let's just see all of this in action right here. So we started with sales at the top And notice some of our discussion from net sales when we were talking about sales returns. So this is net sales right here. So if you guys discuss some of those in your book sales returns, sales discounts, this is where they show up and we would get to a net sales amount, right? We would start with our gross sales subtract out those discounts, those things and get us to this net sales amount of 4.60. Right? So there's our sales and then we subtract from it, cost of goods sold, right? Cost of good soul sales minus cost of goods sold, gets us to our gross profit of 144,000 right there. Right. And from the gross profit, we take out all our operating expenses, notice what we see in their typical things that would happen in operations, paying salary to employees, utilities to run the factory, right, paying our electricity bill, advertising expenses, depreciation expenses, freight out for selling, right? If we had to sell some stuff are selling expense for for the deliveries there, um insurance expense, see all sort of things that are pretty necessary for the business. Right? So we total all those up our total operating expenses right here, 114,000 and it gets us to income from operations of 30 and then here's our non operating stuff right here, right? This is the non operating non operating and we have some revenues and some losses there. Right? We have some interest revenue, some interest expense gain and a loss. Right? So these are non operating things. They're not they don't happen all the time. Okay, So we get those numbers there, we get to an income before income taxes, we take out our income tax and there's our net income. Right? So it's not so complicated. There's just a few steps along the way right after you do a couple of these, um It'll be a no brainer. Alright, let's go ahead and move on to the next video.


Multi-step Income Statement

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Alright, let's try this example and create a multi step income statement. Use the following information for Cool. Corp for the year ended december 31st 2018. Alright, so we've got some accounts here, Sales gains cost of goods sold, so we just have to put them in the correct order for our um for our multi step income statement, I noticed the last thing they tell us here is a tax rate of 40% so they didn't tell us what the income tax expense was, we'll figure it out once we get there. Alright, so here we go, let's start with sales, right at the top, we have our sales revenue and our sales revenue was 443,000, Right? So there's 443,000. So we've dealt with that one, but notice we've got sales discounts right here, right? Sales discounts that lowers the value of our sales account. Uh this was a discount that we gave to customers for paying us quickly. So sales discounts would go right here and actually what we would actually write is something like less sales discounts, right? To signify that we're subtracting This value from our original number. So 23,000 is going to be subtracted there and then we would have our net sales is what we would call it. So net sales revenue would be the amount after these discounts. So we would show here uh 420,000, right? 420,000 in our net sales. Cool. So the first thing we do after we get to sales is take out our cogs right we want to calculate gross profit. So cogs is going to be 136,000, it told us up above. So we've dealt with sales discounts now. We've dealt with cogs. So that's 100 and 36,000 right there. Cool. And we calculate gross profit, right? Our cogs was 1 36. Our gross profit is just gonna be the difference of these 2 420,000 minus 136,000 gives us 284,000 In gross profit. Cool. So the next section is our operating expenses. So let's see what our operating expenses are gonna be. We've got payroll we've got rent and general and administrative those all look like operating expenses. So let's start with payroll, payroll is 75,000 and I'm just gonna write payroll expense X. P. For to save time here. And all right, 75,000 here and notice we have two columns here. This left column is like where we're doing sub totals. And the right hand column is like for the full full balances. So there's our payroll expense. Next. So we dealt with this one let's do rent expense for 36,000. 36,000. And we had one more Which was our general and administrative expenses for 58,000. So I'm gonna put G. And A. For general and administrative Expenses and that was I forgot the number 58,000. Short term memory. Getting away from me there. Alright. 58,000. So we're gonna say total operating expenses and we can put that in our totals column. All right, let's see what that is. So pull out my calculator again, 75,000 plus 36,000 plus 58. That gets us 100 and 69,000 in total operating expenses. Ok. 169,000. Total operating expenses. So now we go into our other revenues and gains. Okay? So we could actually before we get there we could have our income from operations line. So what I would do is under here let me make a little more space. So this is gonna be a little tight. But we would have total up expenses. Right? And we would show that total of 169,000. And then we would show income from operations. Okay, that that wasn't actually written in here. But we should show that on our on our multi step income statement. So the 2 84,000 minus the 1 69 this is our income from operations. Right? This this is like our our core business of whatever we do and all the operating expenses the necessary expenses to run this business. So now we're gonna get to the non operating stuff. So non operating stuff, let's start with it says first other revenues and gains we want to show those first. Right? So what did we have? We had a gain on sale of land. We sold some land for more than it was on our books. And we gotta gain so gain on sale of land Would go in here. And that was I think it was 9,000 9000. Alright. And then we had an other expense here. Right? Interest expense of 4000. So this is an other expense that would go down here, interest expense. And that was 4000. Right? So now we can get to our income before income taxes. Now you want to be careful because the gain on sale of land, that's an increase, right? That's more income. And then the expense that's a decrease. So we'll do the 115,000 plus nine, and then minus four. Right? And that gets us to income before income taxes of 120,000 right here. Cool. The last step is finding out our income tax expense. They told us that they have a tax rate of 40% Right? So we take our income before income taxes. And that's what we're gonna pay taxes on. 120,000 times 400.4, we're gonna pay 48,000 in taxes. Okay? And that was the 120,000 times the 40% tax rate that they gave us up above. And we'll get to our final net income 120,000 minus the 48 in taxes, gets us to net income of 72,000. Alright. And that is our bottom line. That's what we're solving for here. Net income of 72,000. Cool. So you can see there's quite a few steps along the way, but it's not too crazy. Alright, let's go ahead and move on to the next video.