In: Accounting
Identify and describe the key sections of a multi-step income statement. Also, discuss the similarities and differences between operating and non-operating income, and discuss why they are separated. In your own words
A multiple step income statement formats income and expense into subtotals and comprehensive categories to provide more detail to financial statement readers. In other words, a multi-step statement breaks the entire report into three main sections: gross profit, income from operations, and net income. An alternative to the single-step income statement is the multiple-step income statement. This format explicitly segregates the operating revenues and operating expenses from the non-operating revenues, non-operating expenses, gains, and losses. It also shows the gross profit (net sales minus the cost of goods sold).
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Primary distinction | |||
The income which is generated from the core commercial activities of a business. | The income that is generated from any non-core activities of a business. | ||
Types | |||
Income produced from selling primary goods or services of a business. | Rental income, dividend income etc. are some types. | ||
Decision-making | |||
Is vital in decision-making and evaluation process of a company’s results because it varies directly based on the decisions made by management. | Is not very essential in the decision-making process of the company, but it can be still managed or administered. |
Businesses are commercial entities which operate with a primary focus to earn profit and always strive to remain profitable in order to sustain their going concern status. The big portion of profit for any business comes from its main sales or supply of services. Therefore, it is essential that management of a business regulates and plans to constructively grow these activities in order to develop their business further.
Although, non-operating incomes are not of crucial nature, still they can be administered especially if management plans to increase portfolio of its core operations. Additionally, irrespective of the nature, all the expenses and incomes of a business must be completely disclosed in the relevant financial statements to make them useful for stakeholders.