When preparing income statements, a business can choose to use two main formats: single-step or multi-step. The single step is the easier of the two to prepare, but it does not provide some of the valuable details included in the multi-step variety. Here is a detailed explanation of both types, along with an example of each.
One-step income statement
As the name suggests, a one-step income statement uses a single calculation to determine the net income of a business. It simply adds up all the income that a business earns from its trading activities, as well as any other earnings, such as investments or interest income. Then all expenses and losses are added up and subtracted from income / gains, to calculate net income.
A one-step income statement can break down sources of income and expense, as the following example shows, but it doesn’t go into too much detail. Also note how the statement is clearly divided into two areas: income and gains at the top, and expenses and losses at the bottom. This makes it easy to calculate net income in one step.
Multi-step income statement
On the other hand, a multi-step income statement offers a more in-depth look at a company’s performance. A multi-step income statement not only contains a detailed list of income and expenses, but also breaks down the numbers into operating income and expenses resulting from the main business activities of the business and non-operating items, which are not not directly related to the business of the company.
In addition to calculating the bottom line, a multi-step income statement uses intermediate steps (hence the name) to calculate the gross profit and operating profit of the business, two metrics that can be particularly useful for business people. potential investors to compare the performance of similar companies.
The first calculation on a multi-step income statement subtracts cost of goods sold (COGS) from net sales, which produces gross profit.
The second calculation subtracts the company’s operating expenses, such as office supplies and advertising costs, to get operating profit. This can be useful because it only takes into account items related to the business activities of the company and excludes some one-time costs and the performance of investments that the company holds.
Finally, by adding or subtracting the total of the non-operating items of the business, we arrive at the bottom line, which represents the real amount of money a business earned during the period.
Here is a basic example of a multi-step income statement. Notice where the three calculations mentioned take place from top to bottom.
What do most businesses do?
Simpler businesses that are only concerned with their bottom line can use the one-step method when preparing their income statements. However, because of the helpful metrics they contain, most businesses, especially those with investors, choose to use multi-step income statements.
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