Definition of a Multiple Step Income Statement

Investors, management and the board of directors all use the financial statements of an organization in order to ascertain how the company is performing and improving from one year to the next. One of these financial statements is the income statement, which reports revenue, expenses and net income for the year. While some companies prefer to give as little information as possible, the users of the financial statements would rather see details in order to better comprehend the costs of operating the business. This is one of the main reasons for the two different types of income statements -- single and multiple step.

Single Step Income Statement

The single step income statement is a condensed version which merely lists the amount of revenues and expenses that a company incurs over the year. It does not differentiate operating expenses from nonoperating expenses. Many times it does not indicate where the revenues came from, either. It simply reports the amount of revenue that came in, the expenses that the organization incurred and the net income for the year.

Multiple Step Income Statement

A multiple step income statement presents the user with many more details than the single step statement. It breaks revenues down by category, such as interest, sales and dividends. It does the same for the expenses of the company, breaking them down not only into operating and nonoperating expenses, but also by category. These categories include rent, insurance, administrative, wages and salaries. An important aspect of the multiple step income statement is the presentation of cost of goods sold and gross profit. Often investors and management like to comprehend how much it costs to produce the goods that the company sells and how much the business profits from these goods before any reduction for nonoperating expenses.

Reasons for Using Single Step Statement

Since the multiple step income statement gives the users of the financial statements so much more information, you may ask why a company would consider using a single step income statement. Companies do not always wish to disclose, in full detail, exactly how funds are spent throughout the year. Plus, greater detail must surround the bookkeeping of an organization which uses a multiple step income statement, which can cost more.

Statement of Cash Flows

When a organization creates its statement of cash flows, which is another required financial statement, it uses the information from the income statement. One of the categories within the statement of cash flows is that of operating activities. It is much easier to take the information already presented in the income statement and convert it for the statement of cash flows than to begin from scratch. The users of the financial statements also benefit from an ease of comparison, since they can see where certain figures came from.

References

• Accounting Coach: Multiple-Step Income Statement
• "Intermediate Accounting"; J. Weygandt, et al.; 2005