Multi-Step Income Statement vs Single Step

Multi-Step Income Statement vs Single Step

Overview

The income is the final financial result of the various activities of the enterprise. Therefore, the profit formula accumulates the results of operating (main), financial, and investment activities. The Income Statement provides information on the formation of financial results for various types of activities of the organization, as well as the results of various facts of economic activity for the reporting period that can affect the value of the final financial result.

Multi-Step Income Statement vs Single Step

Accordingly, the correct and timely accounting of all cash inflows and outflows of the organization is important for the timely calculation of tax payments and the search for reserves and possible actions to increase the profitability of business activities.

Simply put, the Income statement is expenses being subtracted from the money a company made. There are two ways to present this financial information, so we are going to compare multi-step Income statement vs single step. Despite being prepared differently, both provide the same information and only the ordering in calculating income from operations is different.

Single Step Income

Multiple Step Income

It is simple to put together as it requires only one step to get the result.

It requires more complex calculations with several steps to arrive at the bottom line.

No details are presented, so it is difficult for management and investors to make effective financial decisions.

It provides more thorough information, so management and other parties can make better decisions.

It only calculates a net income amount.

It breaks down the income into gross and net.

It allows for general profitability analysis.

It groups all types of revenues and expenses and does not present any subtotals

It highlights different activities and the results of these activities.

It is typically used by service businesses and small companies.

Larger companies and manufacturing businesses usually use this format.

In addition, the reporting document under consideration is a link between the past and current reporting periods and explains the changes in the Balance sheet of the reporting period compared to the past. In fact, we can say that we can trace a close relationship between the Balance sheet and the Income statement.

The increase in the Balance sheet assets is formed due to the excess of income over expenses, the difference between which is known as profit. The resulting profit is reflected as an increase in equity capital and the Income statement – as a balance of excess of income over expenses or net income. The net income is spent on the payment of dividends, while the remaining part (if any) goes to retained earnings, i.e. joins equity capital.

Single Step Approach

This is a simpler way to put together an Income Statement. It is usually used by service businesses. In this document, you will see business Revenues less Expenses, which gives the Net Income value for this particular company. This approach makes it less time-consuming and complicated to compile this report as you can literally dump all the revenue sources into one category and all expenses into another category.

Nonetheless, the revenue sources and expenses are still listed in a logical order. First, you will typically see revenue that came from the main activities of the business and then all the other revenues. When it comes to the expenses, you would usually have the Cost of Goods Sold listed first, followed by other expenses in a way that tells a logical “story of what is happening in your company when the user reads the document from top to bottom. For instance, you might first list all the direct costs and then all the indirect costs.

Multi-Step Income Statement vs Single Step

Multi-Step Approach

This is a more complex presentation of income and expenses. It is typically used by merchandising businesses. First, you will see a Sales value, which is the same as Revenues. Then, the expenses are broken down slightly differently, so you will first subtract the Cost of Goods Sold or Cost of Sales, which gives the company’s Gross Profit (or Margin).

After that, you will list all the remaining expenses, which are referred to as Selling, General, and Administrative Expenses. These are considered to be operating expenses. You might also see non-operating items, such as Interest revenues, loss on sale of an investment, and Interest expense.

Accordingly, after getting the EBITDA value, you would show Interest, Depreciation, Amortization, and Taxes. As a result, you will get the Net income amount for your company, which will be exactly the same amount as what you would see on an Income statement prepared using a single step approach.