Single-Step Income Statement: Definition, and Example

A multi-step income statement is ideal for large, complex businesses that use a long list of incomes and expenses. On the income statement, operating income is simply the firm’s gross profit minus any operating expenses. Gross profit doesn’t include operating costs such as advertising or research. By adding in these costs, we find the firm’s underlying profitability.

Small business owners have two choices when it comes time to prepare an income statement. Net sales are the result of gross sales minus returns, allowances, and discounts. They are a factor in gross profit but do not include costs of goods sold. Net Sales are the revenues generated by the major activities of the business—usually the sale of products or services or both less any sales discounts and sales returns and allowances. Once the non-operating section is totaled, it is subtracted from or added to the income from operations to compute the net income for the period. The Multi-Step Income Statement is more comprehensive and easier to understand. It can be used to compare more of the company’s products and services at once.

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Erroneous data on an income statement can lead investors into making faulty assumptions about the company’s well-being. Simpler companies that are only concerned with their net income can use the single step method when preparing their income statements. However, because of the useful metrics they contain, most businesses – especially those with investors – choose to use multiple-step income statements.

As we can see from the example of the single-step income statement below, it’s a very basic statement. All revenue streams are simplified and compiled in one section, with all expenses allocated separately. Due to the simplicity, it’s very uncommon among public companies. Often smaller companies will choose to use a single-step income statement due to its ease and simplicity. B) Subtract operating expenses from gross profit to arrive at net operating profit or loss.

Cost of sales

Simpler business structures, such as sole proprietorships and partnerships, have the option of using either the single-step or the multi-step format. A single-step income statement offers a simplified snapshot of a company’s revenue and expenses. This straightforward document merely conveys a company’s revenue, expenses, and bottom-line net income. All revenues and gains are totaled at the top of the statement, while all expenses and losses are totaled at the bottom. This simplified approach makes record-keeping easier for both the accountantswho prepare the statements and the investors who read them.

What works best for each type of entity is different, so be sure to consult a professional if you’re not sure how to work with your specific organization’s numbers. On the income statement, a firm’s net income is known as the ‘bottom line’ profit. This https://simple-accounting.org/ is essentially the profit the firm makes once all costs are paid for. It is calculated by taking income before taxes and subtracting away any taxes which are liable. It is known as ‘the bottom line’ because it is the bottom line of the statement.

Advantages of Multiple-Step Income Statement

A single-step income statement is generally used in the services industry. Most of the essential information is covered in the single-step format. One can easily formula a general view of a company just by using a single-step income statement without diving nose deep into the details. Preparing the single-step income statement involves a simple process using one subtraction to calculate net income.

The income statement includes revenue, other income, COGS, Operating Expense, and non-operating expenses. There are a few subtotals that contain the gross profit, operating margin, EBIT, and Net Income. For a single-step income statement, all-expense are combined, there is only one subtotal which is the net income. One of the important features of the multiple-step income statement is the sub-total for operating income. Notice that net income is the bottom line but it includes a provision for income taxes and also interest expense. In preceding chapters, we illustrated the income statement with only two categories—revenues and expenses.

Advantages of the Multi-Step Income Statement

The first step to creating the statement is gathering the necessary information. The adjusted trial balance is a listing of the company’s accounts and their balances after adjusting journal entries have been made. The total operating expenses are a combination of both selling and admin expenses. These total What Is The Difference Between A Multiple Step Income Statement And A Single Step Income Statement? expenses can then be subtracted from gross profit to arrive at the operating income. A company’s income statement will show the revenues, expenses, and profit or losses in a financial period. The financial period of a company can vary from being monthly, quarterly, or semiannually to even a full year.

A firm’s operating income is the gross profit minus any operating expenses. These operating expenses include utilities, rent, advertising, research and development, or insurance costs. Essentially, any business costs that don’t relate to the cost of goods.