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 single step and multistep income statement? ›
Single Step vs Multi Step Income Statements
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.
Why multi step income statement is preferred over single step income statement? ›
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.
What is a major advantage of the multiple-step income statement over the single step income statement? ›
Answer and Explanation: The major advantage of using the multi-step income statement over the single-step statement is because it enhances the users readability. The user of the statements will able to discern more in-depth information about the financial period.
What is the difference between single statement approach and two statement approach? ›
Single Statement Approach: This format combines the traditional income statement and OCI into one continuous statement. Two-statement Approach: The income statement is presented separately from the statement of comprehensive income.
What is single step income statement used for? ›
The single-step income statement gives a straightforward summary of a business's financial performance for a specific period of time, focusing on the profit earned.
What does a multi-step income statement separate? ›
What is a Multi-Step Income Statement? A multi-step income statement is an income statement that segregates total revenue and expenses into operating and non-operating heads. It offers an in-depth analysis of the business's financial performance in a specific reporting period.
What is an advantage to using a multi-step income? ›
Advantages of a Multi-Step Income Statement
Assists in better analyzing the financial performance and the general health of a company. Investors, creditors, and other stakeholders of interest monitor the gross margin (gross profit divided by revenue) to analyze how efficient a company's operations are.
Who uses a multi-step income statement? ›
Generally, businesses that use multi-step income statements are large, complex companies. Most small businesses and sole proprietorships can get by with just a single-step income statement, since their operations and accounting tend to be straightforward.
Which income statement single or multi-step provides the most information? ›
While single-step income statements provide a quick snapshot of a company's revenue and expenses, multi-step income statements provide a more in-depth look, including a breakdown of gross profit, operating income, and net income.
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.
Which of the following would appear on both a single-step and a multiple-step statement of earnings? ›
Explanation: Cost of goods sold is an expense account that appears on both a single-step and multiple-step income statement.
What is a single statement of profit and loss? ›
A profit and loss (P&L) statement, also known as an income statement, is a financial statement that summarizes the revenues, costs, expenses, and profits/losses of a company during a specified period. These records provide information about a company's ability to generate revenues, manage costs, and make profits.
What is shown on a multi-step income statement but not a single-step income statement? ›
Answer and Explanation:
Accordingly, the gross profit and income from operations appear in the multi-step income statement but not in the single-step income statement.
How multiple-step and single-step income statements differ which type of income statement shows intermediate balances? ›
Answer and Explanation:
The income statement that shows intermediate balances is the "multiple-step income statement". There are two types of income statement, the other one is the "single-step income statement".
