Build a multiple-step income statement · Understanding Accounting

An income statement reports what a company earned and incurred during a period. A multiple-step income statement also shows intermediate amounts between revenue and net income. Those amounts help a reader distinguish the result of selling goods or services from operating costs, borrowing costs, and other gains or losses.

Put each amount in the right part of the statement

First identify what the company sells. A manufacturer's cost of goods sold is the cost of the products it sold. A service company may report the cost of providing services. A company that sells both may call the combined line cost of revenue. These related costs follow customer revenue.

Part of the statement	What belongs there	Result
Customer sales and related cost	Revenue from customers and the cost of goods or services sold	Gross profit
Operating expenses	Selling, administration, and other costs of running the business outside the cost of sales	Operating income
Other gains, losses, and financing costs	Items shown outside the operating group, such as a gain on selling equipment or interest expense	Income before income taxes
Income tax expense	The tax expense reported for the period	Net income, if there is no discontinued operation

The company may have a separately reported discontinued operation. In that case, the after-tax continuing-operations subtotal comes before the discontinued-operation amount and net income. The accounting rules and the facts decide each line's classification; the table is a common teaching form, not a rule that every company must use identical names.

Read what gross profit and operating income mean

Gross profit is customer revenue less the related cost of goods and services sold. The gross profit rate, also called gross margin, divides gross profit by revenue for the same period. It shows the share of each sales dollar left after those costs.

Operating income follows after operating expenses are deducted. The operating margin divides operating income by revenue for the same period. It shows the share left after both the related cost of sales and the operating expenses included in that company's statement.

A warehouse-sale gain is not customer revenue merely because the company received money. Putting it in sales would raise gross profit and operating income in the draft. If the gain still appears once, pretax income and net income do not change. The controller should correct that classification error.

Check a comparison before using a margin

A manufacturer and a professional service company can have different costs and line names. Even two manufacturers may classify some costs differently. Before comparing their gross profit rates, read the revenue and cost lines and the relevant notes. Before comparing operating margins, inspect which expenses each company put above operating income. If the details do not permit a common basis, explain the difference instead of treating the two margins as equivalent.

Quick checkA company includes delivery-to-customer expense in cost of goods sold. It later corrects the expense to a selling line below gross profit. What changes, and what stays the same if the amount is included once?

Answer: Gross profit rises because the expense is no longer in cost of goods sold. Operating income and net income stay the same if the expense remains on the statement as a selling cost. The company must still apply the facts and accounting policy that govern the cost.

For a separate numerical case, work through the Granite Harbor statement. It uses its own supplied amounts, separate from the Granite Harbor classroom case. Then return to your company's statement and identify what each subtotal includes before comparing rates.