Business owners invest their resources into their businesses with the anticipation of earning a decent profit. Each period, the company’s accountant prepares an income statement that communicates the profits earned or the losses incurred for that period. Business owners review these statements to see the progress of their business decisions. Two different formats exist for the income statement: the multi-step income statement and the single-step income statement.
The multi-step income statement offers several advantages to users. These include the higher level of detail and the multiple levels of income reported. The higher level of detail included on the multi-step income statement comes from separating the company's expenses into several different categories, including the cost of goods sold, operating expenses and non-operating expenses. Each level of income comes from subtracting each category of expense. Income levels include gross profit, operating income and net income.
A disadvantage of the multi-step income statement is its preparation, which requires the accountant to classify each expense into the appropriate categories. The accountant also needs to perform multiple calculations to determine each type of income. Another disadvantage is that the financial statement user can potentially be confused about the meaning of each level of income.
The single-step income statement offers several advantages to preparers and users. For the preparer, it requires fewer details and fewer calculations. The preparer adds up all the revenues, adds up all the expenses and subtracts the total expenses from the total revenues to arrive at net income. For the user, only one level of income appears on the statement. With one income figure reported, the user is less likely to be confused by the numbers.
One disadvantage of the single-step income statement is the lack of relevant information communicated. Savvy financial statement users want to understand the various business activities that occur during the period. The single-step income statement does not segregate activities or provide details in its reporting.