A business preparing an income statement has two reporting options available: a single-step income statement or a multi-step income statement. Both of these income statements report on the business’s profits, revenue, and expenses during a given period of time. Whether a business chooses to file a single-step income statement or a multi-step income statement will depend on the structure of the business and the purpose of the income statement.
An income statement is an essential financial document that reports a business’s profits, revenue, and expenses over a period of time. These income statements are helpful for assessing the health and growth of a company and are normally reported with other metrics such as a company’s balance sheet and cash flow statement.
All publicly traded companies are required to follow Generally Accepted Accounting Principles (GAAP), which include filing an income statement after a given period of time. Most private companies also elect to adhere to GAAP standards, even if they are not required.
GAAP permits businesses to file either a single-step income statement or a multi-step income statement, depending on the company’s structure. This article will discuss the key differences, which businesses should use which format, and the advantages and disadvantages of each format.
Single-step income statement
A single-step income statement is a simple reflection of a company’s revenue and expenses over a given period of time in an easy-to-read format. All revenues and gains are totaled at the top of the statement and all expenses and losses are totaled at the bottom. Only one equation is needed to calculate net income:
Single-step income statements offer a glimpse into a business’s net income and offer a simple accounting method for the financial activity of a business. With only one formula needed, these statements are often quick and easy to prepare.
When a business should use a single-step income
Using a single-step income statement is helpful because it does not require a high level of detail and can offer a readable assessment of a business’s profits or net income.A business should elect to use a single-step income statement when under the following conditions:
- The business needs a simple statement that reports only the net income of the business.
- It’s a small business or does not have complex operations.
- The business is a small business.
- The business does not need to separate operating expenses from the cost of sales.
Multi-step income statement
A multi-step income statement reports much of the same information as a single-step income statement, such as a business’s revenue, expenses, and profits. However, a multi-step income statement breaks down operating revenues and operating expenses versus non-operating revenues and non-operating expenses.
Operating revenues and expenses are also known as indirect costs or generalized expenses that go toward a company’s general infrastructure. Examples of operating costs are salaries, marketing, research, legal fees, and rent.
Non-operating revenues and expenses are known as direct costs. These costs refer to expenses for specific items, such as a product. Three formulas are needed to prepare a multi-step income statement and finally calculate net income:
- Gross profit = net sales – cost of goods sold (COGS)
- Operating income = Gross profit – operating expenses
- Net income = Operating income + non-operating items (non-operating revenues, gains, expenses, and losses)
Multi-step income statements offer more information than just net income; these formats offer two more income-related figures that reflect a business’s financial health. In fact, most publicly traded companies will use a multi-step income statement.
What is the difference between a business’s gross profit and net income?
After looking at the equations above, you may be wondering what the difference is between gross profit and net income. Here’s the breakdown:
- Gross profit for a business is also known as gross income or gross margin. Essentially, gross profit is the total amount of money a business makes before accounting for taxes and other expenses such as operating expenses.
- Net income, on the other hand, is how much money a company makes after accounting for all incurred expenses.
Read more about the differences between gross profit and net income in this SuperMoney article.
When a business should use a multi-step income statement
Businesses may choose to use a multi-step income statement when they want a nuanced analysis of margins and an accurate representation of the cost of the goods sold. It can be a good idea to use a multi-step income statement if:
- The business is large and needs more detail in its income statements.
- There is a need to report on gross profit, which is important because it shows how effectively labor and supplies are used to generate revenue.
- The business needs to report on operating income, which highlights how effectively the business is generating a profit from its main activities.
The right business financing to balance your books
Large or small, complex or simple, most growing businesses need financing at some point.
Whether you ultimately determine that you need to use a multi-step income statement or can get by with a single-step statement, maintaining and growing your thriving business may require a business loan or business line of credit at some point.
For your reference, here are a few companies that provide lines of credit for business:
Single-step income statements vs. multi-step income statement
Both a single-step income statement and a multi-step income statement provide insight into a business’s financial performance through reporting its net income, expenses, and revenues. However, a multi-step income statement offers more detail, as it separates operational from non-operational revenues and expenses. What are the advantages and disadvantages of each of these formats?
Advantages and disadvantages of the single-step format
Here is a list of the benefits and the drawbacks to consider.
- Easily prepared: Single-step income statements only require one formula to prepare. With fewer calculations, they are normally easy and fast to prepare and do not require a lot of effort.
- Easily read: All single-step income statements will report the net income on the bottom line. At a glance, a shareholder, investor, or financial advisor can evaluate business activities and business health by quickly identifying the net income.
- Potentially too thin: Some investors, who are looking to evaluate the overall vitality of a business, might find a single-step income statement to be without sufficient financial detail.
- Lose out on investors: Without gross margin and operating margin data, which are important figures to determine the source of most expenses and to project whether a company will be sustainable, investors may not invest in a company.
Advantages and disadvantages of the multi-step format
Here is a list of the benefits and the drawbacks to consider.
- Greater financial detail: An itemized listing of a business’s revenue and expenses helps provide insight into the financial health of the company. A multi-step income statement allows for a deep analysis of margins and accurately represents the cost of goods sold.
- Report gross profit and operating income: Gross profit is an important metric for a business’s operations because it illustrates the efficiency at which a business uses labor and supplies to generate revenue. Similarly, operating income provides insight into the relationship between a company’s primary business activities and its profit.
- Labor intensive: The three step process involved in a multi step income statement can be labor intensive for accounting teams, especially for a small business. In order to accurately produce multi-step income statements, teams must record each type of revenue and expense over a reporting period. Any mistakes could have grave consequences in regard to investors or financial regulations.
- Overkill for most small businesses: Most small businesses do not need a multi-stop income statement to assess their financial health.
What is a single-step income statement?
A single-step income statement reports the revenue, expenses, and profits of a business over a specific period of time. The single-step statement offers a readable, simplified snapshot of a company’s net income at the bottom of the document.
What is the difference between a single and multi-step income statement?
There are a few key differences between a single- and multi-step income statement, but the largest is that the multi-step format is more detailed, differentiating between operating and non-operating expenses. Only one equation is required in the single step format, while three equations are required in the multi-step format.
How do you prepare a single-step income statement?
The following formula is used to prepare the single-step income statement:
- Both a single-step income statement and a multi-step income statement report on the net income of a company over a specific reporting period.
- A single-step income statement is in the most simplified format and only requires one equation to calculate net income. It is best for small businesses and businesses without complex operations,
- A multi-step income statement uses multiple equations to give an itemized breakdown of expenses and revenue.
- A small business looking to take out a bank loan or secure investors might need to prepare a multi-step income statement, as it provides future investors with more financial detail.
View Article Sources
- Beginners’ Guide to Financial Statements — Securities and Exchange Commission
- Generally Accepted Accounting Principles (GAAP) — Securities and Exchange Commission
- Income statement — Definition, Importance and Example — Zoho Books
- Multi-Step Income Statement in Financial Accounting Module 8: Inventory Valuation Methods — Joseph Cooke via Lumen Learning
- Multi-Step Income Statement Chapter Review — Harper College
- The Importance of Generally Accepted Accounting Principles (GAAP) — Husson University
- US GAAP: Generally Accepted Accounting Principles — CFA Institute
- Accountants Vs. CPAs — The Definitive Guide — SuperMoney
- Best Business Lines of Credit — SuperMoney
- Best Personal Business Loans — SuperMoney
- Business Loans for New Businesses — Everything You Should Know — SuperMoney
- Gross Profit vs. Net Income — SuperMoney
- What is Gross Monthly Income? (and 4 Ways to Calculate It) — SuperMoney