An income statement consist of two categories; revenues and expenses. The expenses are deducted from the revenues, resulting at the net income or net loss. However, this is the basic format and a multi-step income statement involves subcategories. Not only does the multi-stp income statement provide operating expenses(revenues and expenses) but it also consist of a nonoperating section, income tax, discontinued operations, extraordinary items, and earnings per share.

The nonoperating section of the income statement list the special gains and losses that are considered unusual or infrequent, but not both. It is usually recorded in one of the follwoing subcategories: other revenues and gains, or other expenses and losses. These subcategories are usually recorded above “Income from operations before income taxes”. Some examples of nonoperating gains and losses would be: write downs of inventories, fluctuation of foreign exchange currency, and effects from a strike.

Income tax, is another subcatergoy that is fairly short and deducts the federal and state tax from income from continuing operations. Along with income tax there is also intraperiod tax allocation on irregular items.
Discontinued operations are the most common type of irregular items in the multi-step income statement.

Discontinued operations result in when a company removes a section of the company that was affecting ongoing operations, or there is no more involvment in that section. Companies report this in the discontinued operations subcategory of the income statement. This subcategory has two parts; the first part is a recording of the gain or loss from the disposal the section of the compnay, and the second part records the results of operations of the section that has been or will be disposed of. The discontinued operations sometimes have an intraperiod tax allocation and “discontinued operations” is located below “income from operations” and above “extraordinary itmes”.

Extraordinary items is also a subcategory in the multi-step income statement that is located below “discontinued operations”. Extraordinary items, are classified are nonrecurring material items that are unusual in nature and the occurence is infrequent. By being unusual in nature, it means, that the event that occurs is abnormal to the environment and isn’t part of the typical company procedures. Also it must occr infrequently. By definition it means that the compan did not forsee the event happening nor does it see it to recur in the future. For example and earthquake or flood could be recorded as a extraordinary item based off the geological region and if it is unusual and infrequent.

Finally earnings per share is calculated into the multi-step income statement. Earnings per share is becoming commonly used and important for most companies to put at the bottom of the income statement. Earnings per share is an equation: (net income - preferred dividends) / weighted averaged of common shares outstanding. For example if the net income was $400,000 the preferred dividend was $100,000 and the weighted average of coomon shares outstanding was $100,000 than the earnings per share would be $3. However, it is not the dollar amount aid to stockholders, but instead measures the amount earne by each share of common stock.

A multi-step income statement is relatively easy to figure out as long as you understand which entries go into which subcategories. It is nothing more than a simple-step income statement with a few add-ins. As long as it follows the order of revenues and expenses, followed by other gains and losses, then discontinued operations, extraordinary items, and inally earnings per share.

Kieso, Weygandt, Warfield. Intermediate Accounting. Vol 1 Thirteenth Edition.