A multi-step income statement separates operating performance from other income and expense. For a merchandising business, it normally shows net sales, cost of goods sold, gross profit, operating expenses, operating income, nonoperating items, and net income.
Core formulas
- Net sales = gross sales − returns − allowances − discounts
- Gross profit = net sales − cost of goods sold
- Operating income = gross profit − operating expenses
- Income before tax = operating income + other income − other expense
- Net income = income before tax − income tax expense
Presentation depends on the applicable accounting framework and entity. “Operating income” is not automatically identical to every definition of EBIT used by analysts.
Complete example
| North River Supply—year ended December 31 | Amount |
|---|---|
| Gross sales | $550,000 |
| Less returns and discounts | ($20,000) |
| Net sales | $530,000 |
| Cost of goods sold | ($318,000) |
| Gross profit | $212,000 |
| Selling expenses | ($62,000) |
| Administrative expenses | ($78,000) |
| Operating income | $72,000 |
| Interest income | $3,000 |
| Interest expense | ($8,000) |
| Income before tax | $67,000 |
| Income tax expense | ($14,000) |
| Net income | $53,000 |
How to prepare the statement
- Complete adjusting entries and a reviewed trial balance.
- Map accounts to net sales, cost of goods sold, operating, nonoperating, and tax sections.
- Confirm inventory and cost-flow calculations.
- Calculate subtotals and compare them with the general ledger.
- Review unusual or material classifications.
- Add comparative periods and explanatory notes when required.
Single-step versus multi-step
A single-step statement groups revenues and expenses and calculates one net result. A multi-step format exposes gross profit and operating income, making margin and operating-cost analysis easier. More detail is useful only when accounts are classified consistently.
Common mistakes
- Calling gross sales “net sales” without returns or discounts
- Putting selling or administrative expense into cost of goods sold without a sound policy
- Mixing one-time gains with operating revenue
- Comparing periods after account mappings changed
- Assuming net income equals cash generated
Use the cost accounting guide to improve product-cost inputs, and connect results to cash management rather than treating profit as liquidity.
Frequently asked questions
Who benefits from a multi-step statement?
Merchandisers and other entities that need gross profit and operating subtotals often find it useful, subject to their reporting requirements.
Is gross profit the same as net income?
No. Gross profit is before operating, nonoperating, and tax items.
Does a service business need cost of goods sold?
Not always. Its relevant direct service costs and presentation depend on facts and accounting policy.
Sources reviewed
Last reviewed: August 15, 2026. The example is simplified and does not replace applicable accounting standards or professional advice.