As a small business, you have two options for preparing an income statement — a single-step income statement and a multi-step income statement. Both types of income statements will show the profits, expenses, and revenues of your business for a given reporting period. However, a multi-step income statement offers a more in-depth analysis of your business’s financial performance.
For many small businesses, the single-step income statement provides all the detail they need to assess the financial health of their companies. However, a multi-step income statement can be worth the extra time and effort it takes to prepare, especially if you’re thinking about applying for a loan or looking to attract an investor.
Here’s a closer look at multi-step income statements vs. single-step income statements, including what each one includes, their pros and cons, examples, and why you might choose one over the other.
Multi-Step vs Single-Step Income Statements
Whether it’s multi-step or single step, an income statement is a key financial statement that shows how profitable your business was over a given reporting period. Both types of income statements show your revenue, minus your expenses and losses.
However, that’s where the similarity ends. A single-step income statement uses a single equation (total revenues minus total expenses and losses) to arrive at net income. A multi-step income statement, on the other hand, follows a three-step process to calculate net income and separates operational from non-operational revenues and expenses. It also calculates gross income, which you won’t find on a single-step income statement.
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Multi-Step Income Statements in Depth
The multi-step income statement uses multiple equations to determine the net income (profit) of the company and offers more details about the gains or losses of a business in a specific reporting period. Unlike a single-step income statement, it separates total revenue and expenses into operating and non-operating headings. It also calculates gross profit and operating income, which aren’t included on a single-step income statement.
While the multi-step income statement takes more time and effort to prepare, it can help provide a detailed analysis of your company’s financial performance.
How Do They Work?
Multi-step income statements are so named because they use multiple equations (or steps) to calculate net income. Along the way, they calculate gross profit and operating income.
There are three calculations involved:
To calculate gross profit:
Gross Profit = Net Sales – Cost of Goods Sold
To calculate operating income:
Operating Income = Gross Profit – Operating Expense
To calculate net income:
Net Income = Operating Income + Non-Operating Items
What Do They Include?
The multi-step income statement format separates a company’s operating revenue and operating expenses from its non-operating revenue and non-operating expenses. These statements include:
• Net sales
• Gross profit
• Operating expenses
• Operating income
• Non-operating income and expenses
• Net income
What Do They Indicate?
Multi-step income statements indicate how a company’s primary business activities generate revenue and affect costs compared to the performance of non-core business activities. These statements also tell you whether the company reported a profit or loss for the reporting period.
Multi-Step Income Statement Pros and Cons
| Pros of Multi-Step Income Statements | Cons of Multi-Step Income Statements |
|---|---|
| Offer more detail about a business’s revenue and expenses than single-step income statements | Labor intensive |
| Report gross profit and operating income | Harder to read and understand at a glance than single-step income statements |
| Provide multiple ways to look at income and profit (operational vs. non-operational) | May not be necessary for some small businesses |
Which Businesses Use Multi-Step Income Statements
Large businesses with multiple sources of revenue and many (and varied) expenses typically use a multi-income income statement. The reason is that this type of statement differentiates incomes and expenses from primary business activities with those from non-essential activities.
However, any business (large or small) that is looking to bring in a new investor or get approved for a business loan can also benefit from issuing a multi-step income statement, since it provides greater financial detail about the business.
Generally Accepted Accounting Principles (GAAP) gives public companies the option of issuing a multi-step or single-step income statement, depending on how they are structured.
Preparing Multi-Step Income Statements
To prepare a multi-step income statement, you need to select your reporting period (you might prepare these statements monthly, quarterly, or annually) and then follow these basic steps.
1. Add operating expenses. This includes the cost of goods sold, as well as other costs (such as advertising and administrative expenses).
2. Calculate gross profit. To do this, you subtract the cost of goods sold from the net sales.
3. Calculate operating income. You do this by subtracting operating expenses from gross profit.
4. Add non-operating revenues and expenses. This includes revenues and expenses from non-operating activities, including interest and the sale or purchase of investments.
5. Calculate net income. To do this, you add together your operating income and your non-operating items.
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Multi-Step Income Statement Example
Here’s an example of a multi-step income statement for fictional company ABC.
| Sales | $20,000 |
| Cost of goods sold | $4,000 |
| Gross profit | $16,000 |
| Operating expenses | |
| Selling expenses | |
| Advertising | $3,000 |
| Administrative expenses | |
| Office equipment/Rent | $2,000 |
| Supplies | $100 |
| Total operating expenses | $3,600 |
| Operating income | $12,400 |
Single-Step Income Statements in Depth
Like a multi-step income statement, a single-step income statement reports the revenue, expenses, and profit (or loss) of a business during a specific period. However, it doesn’t provide the level of detail you get with a multi-step income statement.
The single-step income statement calculates the business’s net income by subtracting losses and expenses from gains and revenue. It includes all expenses (including the cost of goods sold) in one column, rather than breaking them into subcategories like operating and non-operating expenses.
While this statement doesn’t provide as much detail about a business’s financial performance, it’s easy to understand, relatively simple to prepare, and may be all you need if you’re simply looking to assess a company’s profits, or net income.
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How Do They Work?
A single-step income statement presents information in a simplified format. It uses a single subtotal for all revenue line items and a single subtotal for all expense line items, with a net profit or loss appearing at the bottom of the report.
The single-step income statement relies on one equation:
Net Income = (Gains + Revenue) – (Losses + expenses)
Unlike a multi-step income statement, the company’s gross profit is not shown as a subtotal. In order to determine a company’s gross profit, someone reading the income statement will need to subtract the cost of sales from net sales.
What Do They Include?
Single-step income statements include:
• All expenses
• All losses
• All revenues
• All gains
• Net Income
What Do They Indicate?
A single-step income statement tells you a company’s revenue and expenses for a reporting period and provides the firm’s “bottom line” — net income. In a simple, easy-to-read format, this type of income statement indicates whether the company is reporting a profit or a loss for the reporting period.
Single-Step Income Statement Pros and Cons
| Pros of Single-Step Income Statements | Cons of Single-Step Income Statements |
|---|---|
| Easy to prepare | Offers limited information about a business’s financial performance |
| Not cluttered with multiple subtotals | No gross margin or operating margin calculation |
| Can see at a glance how well the business is performing financially | May not be sufficient for potential investors and creditors |
Which Businesses Use Single-Step Income Statements
Single-step income statements are often used by companies that have a simple business structure, such as partnerships or sole proprietors.
In general, a single-step income statement can be a good choice if your business doesn’t have complex operations and/or the need to separate operating expenses from the cost of sales. If all you need is a simple statement that reports the net income of your business, the single-step income statement may be sufficient.
Preparing Single-Step Income Statements
To prepare a single-step income statement, you need to select your reporting period (you might prepare these statements monthly, quarterly, or annually) and then follow these basic steps.
1. Add revenues and gains. This is all the income or money received by the business throughout the period. It includes income from the sales of products and services, as well any money received from non-primary activities, such as the sale of equipment or interest received.
2. Add expenses and losses. This includes the cost of goods sold (such as material cost, direct labor cost, and direct factory overheads), operating expenses (indirect costs associated with doing business, such as utilities, office supplies, and legal fees), non-operating expenses, and any losses.
3. Calculate net income. Once you have numbers for total revenues and total expenses, you subtract the expenses from the revenues to come up with net income for the reporting period. This number may be positive, negative, or zero (meaning total revenue is equal to total expenses).
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Single-Step Income Statement Example
Here’s an example of a single-step income statement from fictional company XYZ.
| Revenues and gains | |
| Sales revenues | $10,000 |
| Sales of assets | $700 |
| Total Revenue and Gains | $10,700 |
| Expenses and losses | |
| Cost of goods sold | $2,000 |
| Office supplies | $100 |
| Advertising and marketing | $1,000 |
| Interest | $300 |
| Lawsuit Loss | $500 |
| Total expenses and losses | $3,900 |
| Net Income | $6,800 |
The Takeaway
Both single-step and multi-step income statements provide a summary of a company’s revenues, expenses, and profits/losses over a given period of time. If you own a small business with a simple operating structure, you can choose whether you want to prepare a single-step or multi-step income statement.
Single-step income statements are easier to prepare and may provide all the details you’ll need to assess the financial health of your company. However, if your small business is seeking a business loan or looking to attract a new investor, you may want to issue a multi-step income statement, since it provides more insight into your company’s financial performance.
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FAQ
How are single-step and multi-step income statements different?
A single step income statement uses a single calculation and only shows net income. A multi-step income statement, by contrast, uses several calculations and shows the gross profit and operating income of the business along with net income.
What are the major sections of a multi-step income statement
The major sections of a multi-step income statement include:
• Operating expenses
• Operating income
• Non-operating income and expenses
• Net income
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