Step by Step: Evaluating the Value of Single and Multi-Step Income Statements

May 1st, 2014
in econ_news, syndication

Econintersect: When reviewing a company’s income statement, there are several key elements that are usually top priorities for consideration. Revenues generated, expenses paid and an overview of profit and losses in general for a specific period of time all need to be presented clearly and concisely within the actual statement itself.

Follow up:

While single-step income statements seem to be the most commonly used format for most small businesses, there are also quite a few companies and organizations that would benefit more from developing a multi-step statement instead. Evaluating the value of the statements and identifying key differences will make it much easier for you to determine which option is the most suitable for your specific needs. You can see a sample Income Statement Template on Shopify that would give you an idea.

What is a Single-Step Statement?

A single-step income statement focuses on one single subtraction, so the mathematics involved with calculating the figures included are relatively simple. Once you have found the sum of all of the revenues and generated gains toward the top of the income statement, you will then focus on finding the sum of the acquired losses and accumulated expenses in a similar fashion. By subtracting the sum of expenses from the sum of your generated revenue, you will be able to easily find the net income.

Many people and professionals have decided to trust more in a single-step income statement primarily because of its simplistic nature. You don’t need to have an extensive accounting knowledge or professional history as an accountant to become skilled enough to develop an accurate single-step income statement.

What is a Multi-Step Income Statement?

Even though it does not require a lot of advanced mathematics, the multi-step income statement still requires more calculations than the standard single-step statement. In order to figure out an approximate net income, you will actually need to process several subtractions instead of just one. However, doing so will allow you to also be able to study other essential elements of your company’s financial reporting, such as the gross profit and operating profit figures.

Along with the convenient simplicity of the single-step income statement, there is one major disadvantage that has forced a lot of business owners, managers and even certified public accountants to pursue the multi-step income statement as an alternative option. That missing puzzle piece is the gross profit, which is a major point to consider – especially for large companies and other major organizations.

The Calculations of a Multi-Step Income Statement

As mentioned earlier, the calculations of a multi-step income statement are a little more tedious than that of a single-step statement. For example, in order to find the approximate gross profit of your company, you will need to first explore and calculate the difference that exists between the costs of goods that have been sold right along with the sales generated. When it comes to determining your company’s approximate net income, there are a few more steps that will need to be taken in order to reach the desired figure.

The common approach taken by most professionals consists of finding the total sum of operating profits. Once that step has been completed, the next step would involve subtracting the sum of all tax expenses, accrued interest along with other extraordinary and unusual items from that initial figure in order to calculate the net income.

Finding the Most Suitable Fit

Now that you have a clear understanding of each statement format as well as the noticeable differences between them both, the next step would be to figure out exactly which format is the perfect fit specifically for your business.

Due to its simplistic nature and easy preparation, it is highly recommended for most sole proprietorships and even partnerships to consider sticking to the basic single-step format. This is mostly because the different streams of income and expenses will more than likely be relatively cut and dry in nature. For example, the income statement of a commissioned sales business would normally just need one separate line for sales commissions and overhead expenses. However, if you are interested in calculating the approximate gross profit for your sales and expenses separately, the best approach to take would be to use a multi-step income statement instead.

Explore All Options and Stay Flexible

When deciding exactly which income statement format you would like to use, make sure that you keep your options open at all times. Always remember that your company’s accounting needs today could be completely different tomorrow or even several years from now. Therefore, taking an additional look at the way your income statement is set up periodically over time will allow you to determine whether or not it would be in your best interests to shift gears and explore an alternative format instead or not. Flexibility in this regard is also a necessary piece of the puzzle that must also be included.

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