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The income statement is one of three important financial statements prepared by a company. While most income statements contain the same or very similar data, the income statement format may vary a bit. Choosing the best income statement format comes down to a few options based on the size and scope of a company. These options include using a single or multistep income statement, including multiple lines for all activities in the business, and preparing the statement for internal or external users. Owners and executives — along with recommendations from accountants — are responsible for helping make this decision.
A single-step income statement format only requires one mathematical procedure for computing operating income or profit. This basic format adds together revenue and gains for a given time period, such as a month or quarter. Then, an accountant adds together expenses and losses for this same time period. The difference between these two figures represents the net income or operating profit for a company during the stated time period. Small businesses — especially those that are based out of an owner’s home — may use this simplistic format for the income statement.
A multistep income statement format is best for those businesses that need more informative data from the financial statement. This statement includes at least three different computations to determine a company’s operating income or profit for the given time period. The first section subtracts cost of goods sold and purchase discounts from gross revenues, which leads to gross profit. Operating expenses subtracted from gross profit results in the operating income for the given time period. Nonoperating expenses and one-time extraordinary items subtracted from operating income represent net income for the business during the stated time period.
The final decision regarding income statement format is the preparation for internal versus external users. Owners and executives may require information in a slightly different format than those who are outside the company. Private companies or those closely held typically have more freedom in creating an income statement format that best works for those inside the company or those who are closely related to it. Publicly held companies must prepare the income statement using a format that meets certain accounting standards and regulations. Public accounting firms and external auditors may also present information for using the proper income statement format so companies can meet the needs of all interested parties and regulations for reporting net income or profit.
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