4 Revenue and Expenses

The Multi-Step Income Statement

A single-step income statement groups all income accounts together and all expenses together, then takes the difference as net income—one step. By contrast, the multi-step income statementMultiple-Step Income Statement:
A company defines gross profit and operating income using their business model, then adjusts for peripheral items (other income and expenses; gains/losses. Lastly, income tax expense is deducted. This method is preferred by standard setters because it uses the business model to classify income and expenses, which gives financial statement users insight into how the company earns profit. To contrast, see Single-step Income Statement. uses a company’s business model to group income and expenses related to operating a company’s business model—called operating income—and then groups all peripheral items like investing income and expenses; gains/losses. Overwhelmed? Ok, let’s take this slow. This section is important. Not only does it instruct on how to create a multi-step income statement, which will earn you grades in your exam, but it also teaches us about evaluating business models. This won’t be easy, but it will be worth it. Get ready!