A multiple-step income statement is a format for the income statement that separates operating revenues and expenses from non-operating items and shows several intermediate subtotals on the way to net income. The usual subtotals are gross profit, operating income and income before income taxes. By contrast, a single-step income statement lists all revenues and gains together, lists all expenses and losses together, and subtracts one total from the other in a single calculation.
The multiple-step format is widely used by retailers, manufacturers and other businesses that sell goods, because it highlights the margin earned on sales before overhead costs. It also makes it easier for readers to tell how much profit comes from the core business and how much from interest, investments or one-off events.
Structure of a multiple-step income statement
- Net sales: gross sales less sales returns, allowances and discounts.
- Cost of goods sold: the cost of the goods or services sold in the period, subtracted to give gross profit.
- Operating expenses: usually split into selling expenses, such as advertising and sales salaries, and general and administrative expenses, such as office rent and accounting staff. Subtracting them gives operating income, also called income from operations.
- Other income and expenses: non-operating items such as interest revenue, interest expense, investment gains and losses, and gains or losses on the sale of assets. Adding these gives income before income taxes.
- Income tax expense: subtracted to give income from continuing operations.
- Discontinued operations: shown net of tax, if any, followed by net income and, for public companies, earnings per share.
Worked example
A home furnishings retailer reports the following for the year, in thousands of dollars:
| Line | Amount |
|---|---|
| Net sales | 12,000 |
| Cost of goods sold | (7,200) |
| Gross profit | 4,800 |
| Selling expenses | (1,900) |
| General and administrative expenses | (1,300) |
| Operating income | 1,600 |
| Interest expense | (250) |
| Gain on sale of equipment | 50 |
| Income before income taxes | 1,400 |
| Income tax expense (25%) | (350) |
| Net income | 1,050 |
From these subtotals, a reader can calculate a gross margin of 40 percent ($4,800 divided by $12,000), an operating margin of about 13.3 percent and a net margin of 8.75 percent. A single-step statement would show the same $1,050 net income but without the gross profit and operating income lines.
Why analysts prefer the multiple-step format
The intermediate figures support ratio analysis. Gross margin shows pricing power and purchasing efficiency; operating margin shows how well the business controls overhead; and the gap between operating income and pre-tax income shows the burden of debt through interest costs. Separating operating from non-operating items also helps analysts forecast, because recurring operating results are more predictable than gains on asset sales or investment income. Converting the statement into a common-size income statement, with every line as a percentage of sales, makes comparisons across years and companies easier.
Rules and limitations
US GAAP does not require a specific format, and SEC Regulation S-X sets out line items for public companies rather than a fixed layout, so companies choose how many steps to show. Service businesses with no cost of goods sold often use a single-step layout. Under IFRS, IAS 1 lets companies analyze expenses by nature or by function; IFRS 18, issued in 2024 and effective from 2027, will require defined subtotals for operating profit and profit before financing and income taxes, bringing IFRS statements closer to a standard multiple-step structure. A limitation of any format is that companies have some discretion over what they call operating, so the same item may be classified differently by different firms. Readers should check the notes, especially for unusual gains, restructuring charges and items that management excludes from adjusted measures. The contribution approach income statement is an internal alternative that groups costs by behavior instead of function.