Single-Step vs. Multiple-Step Income Statements: An Overview
Anincome statementis an essential financial document a company prepares to describe its business activities over a given reporting period. This financial summary of a company's revenue, expenses, and earnings are typically presented as part of a package that also includes a company’s balance sheet and cash flow statement.
All publicly-traded companies in the U.S. must adhere to Generally Accepted Accounting Principles (GAAP), which are accounting standards issued by the Financial Accounting Standards Board (FASB). Many private companies elect to follow GAAP, even though they aren’t legally obligated to do so. In any case, GAAP gives companies the option of issuing either single-step or multiple-step income statements, depending on how they’re structured. Each type of income statement presents both advantages and disadvantages.
Key Takeaways
- Single-step and multiple-step are two ways that companies complying with GAAP accounting standards can report income statements.
- Multiple-Step statements provide an in-depth look at a company's financial health, offering details about the company's wellbeing.
- On the downside, these detailed statements are labor-intensive to produce and can beoverwhelming for some investors to sort through.
- Single-step statements offer a basic look at a company's revenue and expenses, making record-keeping easier for accountants and investors.
- But on the negative side, these income statements are so streamlined that they lack context, and don't include key metrics such as gross margin and operating margin data.
Single-Step Income Statements
A single-step income statement offers a simplified snapshot of a company’s revenue and expenses. This straightforward document merely conveys a company’s revenue, expenses, and bottom-line net income. All revenues and gains are totaled at the top of the statement, while all expenses and losses are totaled at the bottom. This simplified approach makes record-keeping easier for both the accountantswho prepare the statements and the investors who read them. Shareholders need only focus on the net income figure, to gauge a company's overall vitality.
Disadvantages of Single-Step Statements
On the other hand, some investors may find single-step income statements to be too thin on information. The absence of gross margin and operating margin data can make it difficult to determine the source of most expenses and can make it harder to project whether a company will sustain profitability. Without this data, investors may be less likely to invest in a company, causing businesses to miss out on opportunities to acquire operating capital.
Multiple-Step Income Statements
Most publicly-traded companies use multiple-step income statements, which categorize expenses as either direct costs (also known as non-operational costs), or indirect costs (also known as operational costs). Direct costs refer to expenses for a specific item, such as a product, service, or project. Contrarily, indirect costs are generalized expenses that go towards a company’s broader infrastructure, and therefore cannot be assigned to the cost of a specific object. Examples of indirect costs include salaries, marketing efforts, research and development, accounting expenses, legal fees, utilities, phone service, and rent.
The siloed breakdowns in multiple-step income statements allow for deeper analysis of margins and provide more accurate representations of the costs of goods sold. Such specificity gives stakeholders a sharper view of how a company runs its business, by detailing how the gross, operating, and net margins compare.
Multiple-step income statements are used by most publicly-traded companies.
Disadvantages of Multiple-Step Statements
On the downside, multiple-step income statements can be labor-intensive for accounting teams to produce, because of the granularity involved in managing and recording copious data. Case in point: under this method, each type of revenue and expense must be diligently categorized and each transaction must be fastidiously recorded. Any mistake could cause investors to make errant assumptions about the company, which could negatively impact the business.
FAQs
A single-step income statement offers a simple report of a business's profit, using a single equation to calculate net income. A multi-step income statement, on the other hand, separates operational revenues and expenses from non-operational ones and follows a three-step process to calculate net income.
What is the difference between a single and multi-step income statement? ›
A multi step income statement includes subtotals for gross profit, operating expenses, and non-operating expenses. A single step income statement lists line items for revenues and costs and expenses with no subtotals, reaching a total for net income (loss) as the bottom line.
What is the difference between single step and multiple-step income statements primarily an issue? ›
Final answer:
The primary difference between single-step and multiple-step income statements lies in their presentation format, where a single-step income statement provides a simplified view and a multiple-step offers a detailed breakdown of financial activities.
What is an advantage to using a multi step income statement answer? ›
Advantages of a Multi-Step Income Statement
The multi-step income statement helps users in analyzing the performance of the business. Investors, lenders, and other key stakeholders monitor the gross margin of the business, which is calculated as a percentage of net sales.
Why is the multiple-step income statement considered more useful than the single step income statement? ›
The multiple-step income statement is considered more useful than the single-step income statement because it highlights the components of net income.
What is on both a multiple step and single step income statement? ›
Answer and Explanation:
Cost of goods sold is an expense account that appears on both a single-step and multiple-step income statement.
What does a single step income statement do? ›
A single-step income statement is a summary of a business's profitability that uses one calculation to arrive at net income before taxes—hence the single step. It groups all revenue together regardless of the source and does the same for expenses. It then subtracts expenses from revenue to determine net income.
What is the primary difference between the single-step income statement and the multi step income statement quizlet? ›
Detailed classification and numerous subcategories are not reflected in a single-step income statement. A multiple-step income statement format reports several subtotals before computing income from continuing operations and net income.
What is on a multi step income statement? ›
When doing a multiple step income statement, one must remember the key elements. They are: Net Sales, Cost of Goods Sold, Gross Profit, Total Operating Expenses, net gain/loss from other activities, Income before taxes, Income tax expense, and Net Income.
What is a major advantage of the multiple step income statement over the single-step income statement quizlet? ›
The primary advantage of the multiple-step format lies in the simplicity of presentation and the absence of any implication that one type of revenue or expense item has priority over another. Gross profit and income from operations are reported on a multiple-step but not on a single-step income statement.
Advantages of Single-Step Income Statement Format
- It offers a very simple view of all the revenues and expenses of a business. ...
- Most of the essential information is covered in the single-step format. ...
- The company also does not need to hire expensive accountants to manage records to prepare a single-step income statement.
The fixed costs and variable costs are broken out separately. Direct expenses and indirect expenses are broken out separately. Net Income is shown before income taxes.
What are the disadvantages of a single-step income statement? ›
The major disadvantage of the single-step income statement is the absence of showing the important relationship between sales revenue and the cost of goods sold. It also excludes the potential classifications such as income from operations, income after and before taxes, etc.
How to prepare a single-step income statement? ›
The single-step income statement is straight-forward. First, total revenues, then subtract expenses, and, finally, show Net Income.
What is the difference between single-step approach and multistep approach? ›
A single-step income statement offers a simple report of a business's profit, using a single equation to calculate net income. A multi-step income statement, on the other hand, separates operational revenues and expenses from non-operational ones and follows a three-step process to calculate net income.
What is the primary difference between the single-step income statement and the multi-step income statement quizlet? ›
Detailed classification and numerous subcategories are not reflected in a single-step income statement. A multiple-step income statement format reports several subtotals before computing income from continuing operations and net income.
What is on a multi-step income statement? ›
When doing a multiple step income statement, one must remember the key elements. They are: Net Sales, Cost of Goods Sold, Gross Profit, Total Operating Expenses, net gain/loss from other activities, Income before taxes, Income tax expense, and Net Income.
