When preparing income statements, there are two main formats a company can choose to use: single-step or multiple-step. Single-step is the easier of the two to prepare, but it doesn't provide some of the valuable details that are included in the multiple-step variety. Here's a thorough explanation of both types, as well as an example of each.
Single-step income statementsAs the name implies, a single-step income statement uses a single calculation to determine a company's net income. It simply adds up all of the revenue a company brings in from its business activities, as well as any other gains, such as from investments or interest income. Then, any expenses and losses are added up and are subtracted from the revenue/gains, to calculate the net income.
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A single-step income statement may break down the sources of revenue and expenses, as the following example shows, but it doesn't go into too much detail. Also, notice how the statement is clearly split into two areas -- revenue and gains on the top, and expenses and losses on the bottom. This makes the single-step net income calculation easier.
Multiple-step income statementsOn the other hand, a multiple-step income statement offers a more in-depth look at a company's performance. Not only does a multiple-step income statement contain an itemized list of revenue and expenses, it also breaks down the numbers into operating revenue and expenses that result from the company's primary business activities, and non-operating items, which aren't directly related to the company's business.
In addition to calculating net income, a multiple-step income statement uses intermediate steps (hence the name) to calculate the company's gross profit and operating income, two metrics which can be especially useful for prospective investors to compare the performance of similar companies.
The first calculation on a multiple-step income statement subtracts the cost of goods sold (COGS) from the net sales, which produces the gross profit.
The second calculation subtracts the company's operating expenses, such as office supplies and advertising costs, to arrive at the operating income. This can be useful, as it only takes into account the items that have to do with the company's business activities, and excludes certain one-time costs and the performance of any investments the company holds.
Finally, by adding or subtracting the total of the company's non-operating items, we can arrive at the net income, which represents the actual amount of money a company made during the time period.
Here's a basic example of a multiple-step income statement. Notice where the three calculations mentioned take place from top to bottom.
What do most companies do?Simpler companies that are only concerned with their net income can use the single step method when preparing their income statements. However, because of the useful metrics they contain, most businesses especially those with investors choose to use multiple-step income statements.
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