Multistep Income Statement

A multi-step income statement distinguishes between operating and nonoperating items, and it shows the following subtotals in addition to net income:
(a) gross profit
(b) operating income
(c) earnings before taxes

To prepare a multi-step income statement using an adjusted trial balance, first identify each account that is an income statement account. Next, classify revenue and expense accounts as operating or nonoperating items. Then prepare the income statement as follows:
(1) net sales minus cost of goods sold is equal to gross profit
(2) gross profit minus operating expenses is equal to operating income
(3) operating income plus or minus the effect of nonoperating items is equal to earnings before taxes
(4) earnings before taxes minus income tax expense is equal to net income

If the company discontinued one or more operations during the period, then earnings before taxes minus income tax expense will be equal to income from continuing operations, which will then be followed by discontinued operations (net of tax) and then net income.
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