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In financial statement preparation, there are two types of income statements: single-step and multiple-step. The purpose of an income statement is to calculate net income of a company; generally, net income will be the same no matter which type of income statement is used. A multiple-step income statement separates out revenue, costs, gains, and losses to help a company to better understand where it is creating income and where the company is suffering losses. Benefits to using a multiple-step income statement include the ease by which a casual viewer can decipher revenues and expenses, and the general fact that investors can quickly perform a ratio analysis.
A multiple-step income statement begins with sales and then subtracts cost of goods sold. Cost of goods sold are direct costs associated with inventory. Also, it usually is calculated by adding beginning inventory and purchases, then subtracting ending inventory. Subtracting cost of goods sold from sales equals a company's gross profit.
The next step of the multiple-step income statement is the operating expenses section. This section consists of any expenses related to the operation of the company — these are mainly selling and administrative expenses. By subtracting gross profit from total operating expenses, an accountant can calculate a company's operating income.
Generally, the final section of a multiple-step income statement is the non-operating section. This consists of revenue and expenses not associated with the running of operations. These expenses include, but are not limited to, interest, and gains and losses from selling equipment. Operating income minus non-operating income equals the company's net income for the period.
In contrast, the single-step income statement has two parts: revenues and expense. The revenues section of the income statement sums all revenues and gains for the period. The expenses section of the income statement sums all expenses from the year. Accountants subtract expenses from revenues to calculate the net income for the period.
There are two main benefits for using a multiple-step income statement as opposed to a single-step income statement: differentiation based on where the company generated revenue, and easier ratio analysis. The multiple-step statement allows a casual viewer to judge where revenues and expenses come from during a period. For example, if a company has a high net income due to winning a lawsuit for a period, in a multiple-step income statement, this amount would not be included in the company's operating revenue section. Since the lawsuit is not in the operating revenue section, a casual viewer can better judge how successful actual operations in the company are; by contrast, this is not the case with a single-step income statement where the lawsuit is grouped together with all revenue for the period. The second benefit is by breaking down accounts into operating, non-operating, gains, and losses, investors may perform a ratio analysis quicker and more efficiently as the numbers are already broken down into categories for them.
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