Multi-Step vs Single Step Income Statement – All You Need to Know

When it comes to preparing an income statement, the businesses have two options. The two options are a single-step income statement or a multi-step income statement. And they are free to opt for any of the statements. Because the end result of the two options remains the same. The difference is only in the structure of the two methods. To know the option that is best for your firm, it is crucial that you know the differences between Multi-Step vs Single Step Income Statement

Single-Step Income Statement

Such a statement gives a simple view of the company’s profit or loss. In this, we use a single equation to come up with the profit or loss. This method reports revenue, expenses, and profit or loss, but it does so in a single equation. In this, we total all revenues and expenses and subtract them from each other to get the net income. We total all revenues (and gains) at the top of the statement, and then we total all expenses (and losses).

This method uses the following equation:

Net Income (or Loss) = (Revenues + Gains) – (Expenses + Losses)

The biggest advantage of this method is that it is easy to understand and use, and is pretty straight forward.

Multi-Step Income Statement

In such a structure, a specific segregation/split is made between the revenue and expenses on the basis of whether they belong to the operational and non-operational stream. Under this method, there are three steps to calculate the net income or loss for a company. Like the single-step, this method also shows and uses all the information. But, it uses more than one equation to come up with the profit or loss for the company.

Since it differentiates between the operational and non-operational revenues and expenses, it classifies the expenses that could be directly linked or relatable to the business’s operations from those that do not relate directly.

Basically, it uses three equations to come up with the net profit or loss for a business:

  1. Gross Profit = Net Sales – COGS (cost of goods sold)
  2. Operating Income = Gross Profit – Operating Expenses
  3. Net Income = Operating Income + Non-Operating Items

Advantages of Multi Step Income Statement over Single Step

Following are the advantages of a single-step income statement:

Easy to Prepare

Since it takes into account fewer calculations and doesn’t split operational and non-operational revenue and expenses, it is very easy to prepare. Moreover, it involves the use of just one equation.

Easy to Read

Since it is concise and uses just one equation, the single-step income statement is very easy to read. Just a glance, will give a user all the information they need.

Following are the advantages of a multi-step income statement:

More Details

In this, one splits the revenue and expenses into operational and non-operational streams. This gives a better insight into the financial position of a business as well as the impact of non-operational items in the performance of the business.

Gross Profit

This method helps to find the gross profit, in contrast to the single-step income statement. GP is a crucial financial metric as it tells whether or not the company is efficiently using direct material and labor. Making loss or not generating enough margins at a GP level is quite a serious issue for the smooth operations.

Operating Income

Along with gross profit, this method also informs of the operating income or loss. This gives an idea of how well a business uses its primary/core business activities to make an earning.

Multi-Step vs Single Step Income Statement – Disadvantages

Following are the disadvantages of the single-step income statement:

  • It may not give enough information to the investors, such as the gross profit, operating income, and more.
  • Since there is a lack of information, investors may not know the true financial health of a company.
  • Investors may not put their funds in a company that does not reveal all the information.  
  • Even in absence of the information in a property structured manner, it becomes difficult even for the operating management to take the right corrective actions.

Following are the disadvantages of the multi-step income statement:

  • It takes time and effort for the accounting department to come up with such a type of income statement.
  • Since it requires each item to be categorized, there are more likely to be wrong classification and grouping errors.
  • Any mistake may result in investors making wrong assumptions about the business.
single step vs multi step

Multi-Step vs Single Step Income Statement – Example

Suppose a business has the following heads:

Sales $50,000; Interest earned $2500; Profit from asset sale $1500; COGS $37,500; Commission expense $2,500; Office supplies $1,750; office equipment expense $1,250; Advertisement $1,000; Interest expense $250; and loss from lawsuit $750.

Single Step Income Statement

Particular Amount
Sales$50,000
Interest$2,500
Profit from the asset sale$1,500
Total Revenue$54,000
COGS$37,500
Commission expense$2,500
Office supplies$1,750
Office equipment expense$1,250
Advertisement$1,000
Interest expense$250
Loss from lawsuit$750
Total Expenses $45,000
Net Income$9,000

Multi-Step Income Statement

Particular Amount
Sales$50,000
Less: COGS$37,500
Gross Profit $12,500
Operating Expenses 
Commission expense$2,500
Advertisement$1,000
Office supplies$1,750
Office equipment expense$1,250
Total Operating Expenses $6,500
Operating Income$6,000
Non-operating Income/Expenses
Interest Income$2,500
Profit from the asset sale$1,500
Interest expense$250
Loss from lawsuit$750
Total Non-operating Income/Expenses$3,000
Net Income$9,000

Which Should One Use?

If your business is small, or you operate via sole-proprietorships and partnerships, then you can go for either of the two methods. But, if your business is big, or the number of transactions is large, then you must go for the multi-step income statement. Almost all public companies use the multi-step income statement to report their net income.

Also, if a company plans to go for a debt or get new investors, then a multi-step income statement is the right option. This is because it would give stakeholders a true idea of the financial health of the business.

References

Sanjay Bulaki Borad

Sanjay Bulaki Borad

Sanjay Borad is the founder & CEO of eFinanceManagement. He is passionate about keeping and making things simple and easy. Running this blog since 2009 and trying to explain "Financial Management Concepts in Layman's Terms".

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