So now let's see the income statement using the multi-step income statement format. The multi-step income statement format will show a few subtotals on our way down to net income. It's not just going to be all our revenues minus all our expenses in any arbitrary order. We're going to have a specific order that we want to show this stuff. It shows a few subtotals before arriving at net income. And before we dive into all this, let's look at the bottom of the page. I have an example of what a multi-step income statement might look like. Notice, we still start with sales at the top, that's our revenue, and then we're going to start decreasing by different expenses, maybe other revenues might show later on, but our main revenue, our sales revenue, is still going to go at the very top, right? We're going to have these where you see like this gross profit, we're going to talk about what gross profit is, and then we're going to have this income from operations, right, income before income taxes, take out income taxes, and then arrive at net income, alright? So we're going to go through and see how we get from our sales down to net income in this multi-step. Let's go step by step here for all these multi-steps.
The first thing we're going to do is calculate gross profit. We're going to show our sales at the top, our sales revenue, and we're going to subtract from sales revenue the COGS, the cost of goods sold. So gross profit is like the core of our business. If we're thinking about a merchandising business, a business that sells T-shirts, this is going to tell us the profit from that core business, right? We brought in this much money from selling T-shirts, and it cost us this much money to buy those T-shirts. This gross profit is just the core business. Then we're going to take out our operating expenses because if you have a t-shirt business, well it's not so simple just having a box of t-shirts and just selling them, right? You're going to have expenses for your employees, for the warehouse, the storefront; all these things are going to cost money, but it's not that core business, right? So these are the other expenses that are super necessary to run the business. These are going to be our operating expenses and are necessary for the regular course of business. So inside of operating expenses, here are some examples: you see like payroll for employees, selling expenses for actually selling the goods, general and administrative expenses, rent on the office, general expenses like the phone bills, all sorts of things that you need to run the business. And then rent expense, obviously, the rent on the facility.
We're going to show categories of operating expenses, and then we're going to get to another subtotal, here it's going to be the gross profit. Remember, this gross profit is already a subtotal, right? We had taken our revenue, our sales revenue minus our COGS to get to gross profit and then from gross profit, we subtract our operating expenses. That's going to get us to this income from operations. Income from operations is a good number for again our core business, but now it includes those other essential costs, where gross profit was just the focus of the t-shirt selling, right? Buying and selling t-shirts, now it's the actual operation of the business. And then after we get income from operations, we're going to show all our non-operating stuff, right? The business is going to go through some things that maybe we sell old machinery, that's not the core of our business but it is a transaction that comes up in business. It's not an operating thing. So let's see what some of these non-operating activities could be. We could get revenues, so this is another place where we might see revenues. It's not just at the very top. The very top is showing our core business revenues, like sales of the t-shirts or whatever. Where we might see some other revenues that might happen to come about, and we'll see expenses and losses here as well. But remember these are not in the ordinary course of business. So the first one would be interest revenue is what we call non-operating. So if we're loaning money out or something like that, and we get some interest, well we're not a bank, right? We're a t-shirt company, but we're earning some interest on the side. Because we had some extra cash, we made a loan, whatever it might be. We're allowed to do that, right? It's just not our core business. So it would be here in the non-operating activities. And that would be interest revenue or dividend revenue.
Dividend revenue would be a situation where, let's say we bought stock in Apple, Apple Corporation, right? And then Apple pays a dividend. Well, we, the company owns some of that stock, so they have rights to that dividend, that's revenue to the company. But we're not like an investment bank, right? Our business is not earning dividends, our business is buying and selling T-shirts in this example. So that dividend revenue, even though it brought in some money, it's non-operating. Same goes with rent revenue, right? We're not in the business of being a rental company, but maybe we sublease part of our store to another company, whatever it might be, we could earn some rent. We'll also see in here something called a gain or a loss, okay? I want to separate the idea of a revenue from a gain or a loss, a gain, or a loss, usually comes up as a net amount after a sale. So let's say you had some old machinery that was still on your books, and let's say it had a value on your books of $10,000 and you sold that machinery for $20,000. Well in this case, you don't have a revenue of $20,000. We're going to say you have a gain of the $10,000 that you earned, right? The $10,000 extra would be a gain. So we'll talk about gains and losses a little more later in the course, but this is where they would show up. They're non-operating. In that case where we're selling machinery, we're not in the business of buying and selling machinery. It just comes about every now and then, right? Non-operating.
Interest expense. So when we pay interest on a bank loan, this is another non-operating activity and other losses. We might have some other losses here from an employee strike. Those things aren't going to come up very often at all. So there you go. Non-operating activities. So finally, we get to our next subtotal, the income before income taxes. Notice the income tax expense has not shown up anywhere yet. Income tax expense is always the last expense at the bottom. So we have income before income taxes and that's going to be our income from operations. So our last subtotal, right? We had income from operations up here, income from operations, and I'm going to put income from operations to make it fit in that spot. Income from operations minus our non-operating activity. This gets us to this last subtotal, which is income before income taxes. And then we're going to take our income tax expense. So we're going to have our income before income taxes and then we're going to subtract the income tax expense and that's the final one. Everything's been accounted for now. We've gotten all our expenses in there. All our revenues are in there, so we're now at net income. That is our final balance at the bottom, okay? So let's just see all of this in action right here. So we started with sales at the top, and notice some of our discussion from net sales, what we're talking about sales returns, so this is net sales right here. So if you guys discuss some of those in your book sales returns, sales discounts, this is where they'd show up and we would get to a net sales amount, right? We would start with our gross sales, subtract out those discounts, those things and get us to this net sales amount of $460,000 right? So there's our sales and then we subtract from it cost of goods sold, right? Cost of goods sold, sales minus_cost_of_goods_sold gets us to our gross profit of $144,000 right there. Right? And from the gross profit, we take out all our operating expenses. Notice what we see in there. Typical things that would happen in operations, paying salary to employees, utilities to run the factory, right, paying our electricity bill, advertising expenses, depreciation expenses, freight out for selling, right? If we have to sell some stuff, our selling expense for the deliveries there, insurance expense. See all sorts of things that are pretty necessary for the business, right? So we total all those up, our total operating expenses right here $114,000 and it gets us to income from operations of $30,000 and then here's our non-operating stuff right here, right? This is the non-operating. And we have some revenues and some losses there, right? We had some interest revenues, some interest expense, gain, and a loss, right? So these are non-operating things. They don't happen all the time. Okay? So we get those numbers there, we get to an income before income taxes, we take out our income tax and there's our net income. Right? So it's not so complicated, there are just a few steps along the way, right? After you do a couple of these, it'll be a no brainer. Alright? Let's go ahead and move on to the next video.
