There are two reporting options available for business owners when preparing an income statement. These are either the single-step income statement or the multi-step income statement.
Single-Step Income Statement
The single-step income statement is the approach where all the expenses are listed in one column; that is, it does not classify the expenses such as operating costs, non-operating costs, cost of sales, among others ("Single-Step Income Statement | Advantages, Disadvantages, Example”). This approach is mostly used when the business is still in its infancy, when there are not many activities or items to report. The single-step approach uses one equation to calculate net profit, that is;
Delegate your assignment to our experts and they will do the rest.
Net Income = (Revenue + Gains) – (Expenses + Losses)
Advantages
It offers a simplistic outlook of the expenses and revenues of the organization, making it easy to comprehend. This means that the person looking at it does not have to be a financial expert to extract useful information about the organization from the statement.
Most of the important details are covered by this approach, giving an investor a general view of the company.
The simplicity of this approach means there is no need for expensive accountants to manage records of the organization.
Disadvantages
The simplicity of its nature means it might not be enough for sophisticated investors who want more information before making an investment decision.
It is difficult to make accurate future projections with this approach since there are no gross or operating margins.
It does not distinguish between revenue from primary company activities and other sources. This may lead to investors misunderstanding the information.
Multi-Step Income Statement
On the other hand, the multi-step income statement categorizes the gains, losses, expenses, and revenues into several sections, subsections, and subtotals, referred to as "heads." When using this approach, multiple steps are followed to obtain the comprehensive income, net profit, profit from ongoing activities, and the operating income ("Multi-Step Income Statement | Components, Advantages, Example”). This approach is used when the business is much larger and there are several transactions being carried out that have to be recorded.
Advantages
It offers a lot of details that are useful to a potential investor or stakeholder.
It helps to assess the financial performance of the organization better.
Unusual activities are isolated and categorized under ‘non-operating activities’ to suggest they are not recurrent. This means they can be ignored by a stock analyst when valuing the organization for a potential merger.
Disadvantages
It is too much sophisticated for the average user to interpret and understand.
May require the organization to hire skilled accountants to maintain the organization’s records, which could be costly.
Differences between single-step and multi-step income statements
The single-step approach only utilizes one stage to compute the business's net profit, while the multi-step approach uses several steps.
A single-step income statement is straightforward, lacking in details, while the multi-step income statement is more comprehensive with more details.
The simplistic nature of the single-step approach makes it useful in the service industry, while the manufacturing industry mostly utilizes the multi-step approach due to its detailed nature.
The single-step approach only shows the net income, while a multi-step approach shows both the gross and net profits.
References
Single-Step Income Statement | Advantages, Disadvantages, Example . Studyfinance.com. Retrieved from https://studyfinance.com/single-step-income-statement/ .
Multi-Step Income Statement | Components, Advantages, Example . Studyfinance.com. Retrieved 9 June 2021, from https://studyfinance.com/multi-step-income-statement/ .
