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
Single Step vs Multi Step Income Statements
What is the difference between single and multi-step income statements? ›
Unlike the single-step format's focus on net income, the multi-step income statement uses the additional level of detail to calculate two more income-related figures. The first figure calculated is gross profit, which is determined by subtracting the cost of goods sold from net sales.
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 an advantage to using a multi-step income statement? ›
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.
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.
Who uses single-step income statement? ›
Single-step income statements can be appropriate for small businesses, such as single-product or single-service businesses, sole proprietors, and partnerships. Large and more complex businesses use multi-step income statements.
What two advantages does single-step have? ›
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 multi-step income statement categorizes operating and non-operating incomes and expenses. It helps users evaluate the financial performance of the organization. The users will know the profit earned from the primary activities of buying and selling goods and how it differs from the non-operating activities.
Which of the following makes the multiple step income statement more useful than the single step income statement? ›
The multiple-step income statement is often preferred by investors since it shows important subtotals such as the Gross Profit, Operating Income, EBITDA, and Net Income Before Tax instead of simply showing all expenses grouped together as in the single-step income statement.
How does a multiple step income statement for a merchandiser differ from a single step income statement as it reports? ›
In contrast, a multi-step income statement divides both revenues and expenses into operating and nonoperating (other) items. The statement also separates operating expenses into selling and administrative expenses.
The major weakness of a single step form for the income statement is that because of a single format available, the expenditures incurred are separated from the incomes in one go, which generates the chances of error. Hence there may be deviations on the net income of the particular period.
What are the challenges of multi-step income statement? ›
From an accounting perspective, a drawback of the multi-step income statement is that it takes much longer to prepare than a single-step statement. Not only is each category of income separated, but within each category, the statement provides a detailed list of major sources of revenue and expenses.
What is an advantage to using a multi-step income statement in Chegg? ›
What is an advantage of using the multiple - step income statement? Net income will be higher than net income computed using the single - step income statement. It highlights the components of net income. Gross profit is not a separate item.
Which is better single-step or multi step income statement? ›
A multi step income statement is important because it provides the company, investors, lenders, and other stakeholders deep insight into a company's financial performance during a period of time and its operating trends. These are advantages or pros compared to the single-step income statement format.
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 brainly? ›
To summarize, the major advantage of the multiple-step income statement is that it provides a more detailed breakdown of revenues and expenses, helping to analyze the company's financial performance in a more comprehensive manner.
What does a multi-step income statement separate? ›
It separates revenues and expenses from activities that are directly related to the business operations from activities that are not directly tied to the operations.
Is the difference between single step and multiple step income statements primarily an issue of multiple choice measurement valuation presentation consistency? ›
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 does a single step income statement report different types of revenue that include? ›
The single-step income statement has only two sections; in the first section, all revenues and gains are presented, and in the second are all expenses and losses. Operating and non-operating items are not separated, and product and period costs are presented together as well. In the end, the net income is presented.
What is a single financial statement? ›
(c) A single financial statement or to a specific element of a financial statement includes the related notes. The related notes ordinarily comprise a summary of significant accounting policies and other explanatory information relevant to the financial statement or to the element.
