Multi-step Income Statement: Videos & Practice Problems

The multi-step income statement provides a structured approach to calculating net income, starting with sales revenue and subtracting the cost of goods sold (COGS) to determine gross profit. Operating expenses, such as payroll and rent, are then deducted to find income from operations. Non-operating activities, including interest revenue and gains from asset sales, are accounted for next, leading to income before income taxes. Finally, after subtracting income tax expense, net income is calculated, reflecting the company's overall profitability.

Multi-step Income Statement

The multi-step income statement is a structured financial report that provides a detailed breakdown of a company's revenues and expenses, ultimately leading to net income. This format is beneficial as it highlights key subtotals, allowing for a clearer understanding of a company's financial performance.

At the top of the statement, sales revenue is recorded, representing the total income generated from selling goods or services. From this figure, the cost of goods sold (COGS) is subtracted to calculate gross profit. Gross profit reflects the core profitability of the business, indicating how much money is made from sales after accounting for the direct costs associated with producing those goods.

Next, operating expenses are deducted from gross profit to arrive at income from operations. Operating expenses include necessary costs such as salaries, rent, utilities, and other administrative expenses that are essential for running the business but are not directly tied to the production of goods. This subtotal provides insight into the profitability of the company's core operations.

Following income from operations, the statement includes non-operating activities, which encompass revenues and expenses not related to the primary business operations. Examples of non-operating revenues include interest income from loans or dividends received from investments. Conversely, non-operating expenses might include interest expenses on loans or losses from the sale of assets. These items are important as they can significantly impact the overall financial results, even though they are not part of the regular business activities.

After accounting for non-operating activities, the next subtotal is income before income taxes. This figure is derived from income from operations adjusted for non-operating revenues and expenses. Finally, the income tax expense is deducted from this subtotal to determine net income, which represents the company's total profit after all expenses have been accounted for.

In summary, the multi-step income statement provides a comprehensive view of a company's financial performance by breaking down revenues and expenses into meaningful categories. This format not only aids in understanding the core profitability of the business but also highlights the impact of non-operating activities on overall financial results.

Multi-step Income Statement

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Multi-Step Income Statement for Cool Corp

For the year ended December 31, 2018, Cool Corp's multi-step income statement is structured to provide a detailed view of the company's financial performance. The statement begins with sales revenue, which is the total income generated from sales before any deductions.

Sales Revenue: \$443,000

Less: Sales Discounts: \$23,000

Net Sales Revenue: \$420,000

Next, we calculate the cost of goods sold (COGS), which represents the direct costs attributable to the production of the goods sold by the company.

Cost of Goods Sold: \$136,000

Gross Profit: Net Sales Revenue - COGS = \$420,000 - \$136,000 = \$284,000

Following the gross profit, we list the operating expenses, which are the costs required to run the business that are not directly tied to the production of goods.

Operating Expenses:

• Payroll Expense: \$75,000
• Rent Expense: \$36,000
• General and Administrative Expenses: \$58,000

Total Operating Expenses: \$75,000 + \$36,000 + \$58,000 = \$169,000

Now, we calculate the income from operations, which reflects the profit generated from the core business activities.

Income from Operations: Gross Profit - Total Operating Expenses = \$284,000 - \$169,000 = \$115,000

Next, we account for other revenues and gains, as well as other expenses. This includes any income generated from non-operating activities.

Other Revenues and Gains:

• Gain on Sale of Land: \$9,000

Other Expenses:

• Interest Expense: \$4,000

We then calculate the income before income taxes, which summarizes the total income before tax obligations are deducted.

Income Before Income Taxes: Income from Operations + Other Revenues - Other Expenses = \$115,000 + \$9,000 - \$4,000 = \$120,000

To determine the income tax expense, we apply the tax rate to the income before taxes.

Income Tax Expense: Income Before Income Taxes × Tax Rate = \$120,000 × 0.40 = \$48,000

Finally, we arrive at the net income, which represents the company's total profit after all expenses, including taxes, have been deducted.

Net Income: Income Before Income Taxes - Income Tax Expense = \$120,000 - \$48,000 = \$72,000

This multi-step income statement provides a comprehensive overview of Cool Corp's financial performance, highlighting key components such as net sales, gross profit, operating expenses, and net income.

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Here’s what students ask on this topic:

What is a multi-step income statement?

A multi-step income statement is a detailed financial report that separates operating and non-operating activities to provide a clearer picture of a company's financial performance. It starts with sales revenue and subtracts the cost of goods sold (COGS) to determine gross profit. Then, it deducts operating expenses, such as payroll and rent, to find income from operations. Non-operating activities, including interest revenue and gains from asset sales, are accounted for next, leading to income before income taxes. Finally, after subtracting income tax expense, net income is calculated, reflecting the company's overall profitability.

How do you calculate gross profit in a multi-step income statement?

Gross profit in a multi-step income statement is calculated by subtracting the cost of goods sold (COGS) from sales revenue. The formula is:

$\mathrm{Gross} \mathrm{Profit}=\mathrm{Sales} \mathrm{Revenue}-\mathrm{COGS}$

This figure represents the profit from the company's core business activities before accounting for operating expenses and non-operating activities.

What are operating expenses in a multi-step income statement?

Operating expenses in a multi-step income statement are the costs necessary to run the business that are not directly tied to the production of goods or services. Examples include payroll for employees, rent, utilities, advertising, and general administrative expenses. These expenses are deducted from gross profit to determine income from operations, which reflects the profitability of the company's core business activities.

What is the difference between operating and non-operating activities in a multi-step income statement?

Operating activities in a multi-step income statement are related to the core business operations, such as sales revenue and operating expenses (e.g., payroll, rent). Non-operating activities are not part of the core business and include items like interest revenue, gains or losses from asset sales, and interest expenses. These are accounted for separately to provide a clearer picture of the company's operational performance versus incidental financial activities.

How is net income calculated in a multi-step income statement?

Net income in a multi-step income statement is calculated by following these steps:

1. Start with sales revenue.
2. Subtract the cost of goods sold (COGS) to get gross profit.
3. Deduct operating expenses from gross profit to find income from operations.
4. Account for non-operating activities (e.g., interest revenue, gains, and losses) to determine income before income taxes.
5. Subtract income tax expense from income before income taxes to arrive at net income.

The formula is:

$\mathrm{Net} \mathrm{Income}=\mathrm{Income} \mathrm{Before} \mathrm{Income} \mathrm{Taxes}-\mathrm{Income} \mathrm{Tax} \mathrm{Expense}$