Going back to our retailer example, the total sales figure would include all merchandise sales made during the period and the cost of goods sold would include all expenses paid to purchase, ship, and get the merchandise ready for sale. This is a key figure for investors, creditors, and internal management because it shows how profitable the company is at selling its goods or making its products.
The first section computes the gross profit of the business by subtracting the cost of goods sold from the total sales. The operating section is subdivided into two main sections that list the primary business income and expenses. The multistep income statement format is broken down into two main sections: operating and non-operating. They must be separated into meaningful categories. To do this, all income and expenses cannot be listed together. Investors and creditors want to know how efficiently the retailer sells its merchandise without diluting the numbers with other gains and losses from non-merchandise related sales. For instance, a retailer’s main function is to sell merchandise. Investors and creditors can evaluate how well a company performs its main functions separate from any other activities the business is involved in. This is particularly helpful for analyzing the performance of the business. Unlike the single step income statement format where all revenues are combined in one main income listing and all expenses are totaled together, the multiple step statement lists these activities in separate sections, so users can better understand of the core business operations. A simple multiple step income statement separates income, expenses, gains, and losses into two meaningful sub-categories called operating and non-operating.