Question

Identify at least two critical items of a multistep income statement that is useful to creditors. Provide a rationale for your response

Answer 1

When preparing an income statement the small businesses have two options for reporting: single-step income statement or a multi-step income statement. Multi-step income statements provide an itemized breakdown for the revenue and expenses of business, categorized by operating and non-operating activities. It provides more deep insight into the financial position of the company for the creditors. The creditors know the profit earned from the main activities of buying and selling products and how these differ from the non-operating activities. The two critical items of a multistep income statement are:

-- Operating income: It is computed as gross profit less operating expenses such as supplies, advertising, sales commissions, or office equipment. Operating income does not consider the interest and taxes from the gross profit and decreases it by any operating expenses. It decreases the financial clutter and highlights the primary activities of company financials, the operational portion and helps the creditors to determine an overall health of the company

-- Non-Operating Head: It provides the incomes and expenses that are not related to the main activities of the company such as lawsuit claim paid by the business and insurance compensation paid by an insurance firm to the business. This information helps the creditors to make quick decisions without additional computations.