The multi-step income statement is a method of presenting the financial results of a company by segmenting the revenue, costs, and expenses into distinct sections. The types of income statements are single-step, which arrives at net income by performing one calculation, and the multi-step format, which reaches net income through multiple calculations. Multi-step statements are more detailed and segmented according to types of income and expenses, which show how a business progresses toward net income, or in some cases a net loss.

For instance, as per the snapshot above, the net income for ABC Company for the year 2019 is a total of $32,800 ($42,000 – $9,200).
Multi-step income statements also use multiple equations to calculate net income.
Small businesses with a simple operating structure, including sole-proprietorships and partnerships, can choose between creating single-step or multi-step income statements.
A multi-step income statement reports much of the same general information included in a single-step income statement, but it uses multiple equations to determine the net income, or profit, of the company.

As they grow in size and complexity, businesses graduate to the multi-step income statement, which sorts revenue and expenses into categories and shows how a business determines net income before taxes. Creditors may find income statements of limited use, as they are more concerned about a company’s future cash flows than its past profitability. income tax calculator Research analysts use the income statement to compare year-on-year and quarter-on-quarter performance. One can infer, for example, whether a company’s efforts at reducing the cost of sales helped it improve profits over time, or whether management kept tabs on operating expenses without compromising on profitability.

Primary-Activity Expenses

Investors, analysts and various other stake holders also prefers multi step income statement as they present more information as compared to single step format. The main difference between single-step and multiple-step income statements is that the former calculates net income on one line, while the latter breaks down costs by their respective categories. A single-step income statement is a format in which all of the expenses, including the cost of goods sold, are listed in one column. Put simply, a single-step income statement does not separate the expenses into categories like the cost of goods sold, operating expenses, non-operating expenses, or other expenses. Unlike the income statements above, this type of report is prepared to show to entities or individuals outside the company. This accounting method makes it possible to capture all fixed costs related to the production of a specific product.

The single-step income statement is for any business that wants to keep track of the money coming in and going out.
Though calculations involve simple additions and subtractions, the order in which the various entries appear in the statement and their relationships often get repetitive and complicated.
Investors, analysts and various other stake holders also prefers multi step income statement as they present more information as compared to single step format.
Pay no monthly fees, get payouts up to four days earlier, and earn cashback on eligible purchases.
The single-step income statement is the financial statement report that shows all expenses, including the cost of goods sold, of a company.

They offer less details about a company’s financial activity, but they’re easier to prepare and straightforward to read. Multi-step income statements also use multiple equations to calculate net income. It provides a description (simple or detailed) of business activities during an accounting period. Instead, individual expense accounts are combined into broad categories like selling expenses, general and administrative expenses, and cost of goods sold. A single step income statement is a format of income statement, which uses just a single subtraction i.e. the total of all revenues, incomes, and gains minus the total of all expenses and losses. However, real-world companies often operate on a global scale, have diversified business segments offering a mix of products and services, and frequently get involved in mergers, acquisitions, and strategic partnerships.

Another application for a multiple-step income statement is dividing costs into direct and indirect costs for cost accounting by management accountants. A multi step income statement is more detailed than a simple single step income statement. It provides insights that financial statement users need when reading a profit and loss statement prepared using GAAP accounting standards.

Single-step income statements open with a header conveying important information about the document. The header states the name of the company, identifies the report as an income statement and includes the time period covered in the document. A single-step income statement focuses on reporting the net income of the business using a single calculation. A multi-step income statement is more detailed and calculates the gross profit and operating income of the business using multiple calculations and an itemized breakdown. The single-step income statement is a simple straightforward document that only provides a snapshot of the company’s revenues, expenses, and profits or losses for the year. Therefore, its application is limited to smaller organizations or for internal management consumption of larger organizations.

How to Prepare a Multi Step Income Statement

They also calculate net income, reaching the same result, although by different processes. This combines expenses of operating the business, such as production and administration, and non-operating expenses, such as interest paid on debt. Competitors also may use them to gain insights about the success parameters of a company and focus areas such as lifting R&D spending. These are all expenses incurred for earning the average operating revenue linked to the primary activity of the business. They include the cost of goods sold (COGS); selling, general, and administrative (SG&A) expenses; depreciation or amortization; and research and development (R&D) expenses. Typical items that make up the list are employee wages, sales commissions, and expenses for utilities such as electricity and transportation.

What is a multi-step income statement?

These profit figures allow quick analysis of a company’s efficiency, expressed as profit margins. Our work has been directly cited by organizations including Entrepreneur, Business Insider, Investopedia, Forbes, CNBC, and many others. We follow strict ethical journalism practices, which includes presenting unbiased information and citing reliable, attributed resources. Finance Strategists is a leading financial education organization that connects people with financial professionals, priding itself on providing accurate and reliable financial information to millions of readers each year. It’s also perfect for businesses that are just starting out, as it provides basic numbers without spending too much time or effort on calculations. They’re also helpful after a business has been operating for some time, as they make it easy to compare different periods (such as comparing fiscal year to fiscal year results) by showing the basic calculations.

The Advantages of Using a Single-Step Income Statement

For instance, interest expense is a non-operating cost since the item pertains to the financing activities of a company rather than any of its specific operating activities. Contrary to operating costs, non-operating costs are not part of the core, recurring operating activities of a company. A financial professional will offer guidance based on the information provided and offer a no-obligation call to better understand your situation.

This is great for simplicity’s sake, but it doesn’t give the external users of the financial statements much information about the company operations. Typically, public companies are required to issue a multi-step statement to the public. Private companies are often required by banks and other creditors to either issue a multi-step statement or develop a detailed schedule listing specific expenses in order to get financing. Single-step income statements can be appropriate for small businesses, such as single-product or single-service businesses, sole proprietors, and partnerships. Manufacturers, for example, use multi-step income statements to clearly separate production and overhead costs. Despite the growth, it’s still a simple business with you handling the orders and managing the day-to-day.

Advantages of single-step income statements

It turns out that this report takes into account fixed manufacturing costs when calculating the cost of goods manufactured, leaving some to view it as a complete picture of the financial performance of the business. Small companies such as partnerships, sole proprietorships, and service companies use this type of return, while those selling tangible goods opt for the multi-step format. It issues a single subtotal for income items and a single subtotal for expense items. The single-step statement subtracts total expenses from total income to calculate net income. You can also calculate total regular expenses; this includes stuff like supplies and office rent that aren’t part of regular production costs. There are two ways to calculate expenses on a single-step income statement, but you’ll most likely use “cost of goods sold” (or COGS for short).