Multi-Step Income Statement Vs. Single-Step Statement

An income statement, also called an earnings report or a profit-and-loss statement, shows a company's fiscal operations during a specified time period. These income statements, typically produced quarterly or annually, display the company's revenues, expenses and the difference between the two. Companies with specific business structures, such as corporations, must produce a multiple-step income statement, while other companies have the option of presenting a single-step income statement.

Advantages of Multiple-Step Income Statement

A multiple-step income statement includes an itemized list of a company's various sources of revenues and expenses. A multiple-step income statement reveals the company's gross profit, which is the difference between its sales revenue and its cost of goods sold, and operating profit, which is the difference between its gross profit and its operating expenses. Investors and financial analysts often use the data from multiple-step income statements to determine a company's overall health, such as its gross margin and profit margin.

Drawbacks of Multiple-Step Income Statement

While the multiple-step income statement provides some extensive information on the company's operations, the processes involved in producing details in these statements can be complex and time-consuming. Accountants must specify categories for each type of revenue and expense, then record each transaction and place the proper amounts in each category. If a transaction is entered into an improper category, the mistake could affect how the income statement displays its results. Erroneous data on an income statement can lead investors into making faulty assumptions about the company's well-being.

Advantages of Single-Step Income Statement

Businesses with a simple structure, such as sole proprietorships and partnerships, often see numerous advantages in using the single-step income statement. The simplified statement shows expenses in a single line for net income, rather than breaking up the results by gross profit and operating profit. This approach makes the record-keeping task much easier for the accountants who prepare the statements. Readers of these statements can also focus on a single number -- net income -- to assess the company's health.

Drawbacks of Single-Step Income Statement

The most noticeable drawback of the single-step income statement lies in its lack of information. Investors and lenders often assess the worthiness of a company on factors other than its net income. They frequently examine such factors as gross margin and operating margin to determine where most expenses originate from and if the company can sustain its profitability. Without supplying this data, small businesses can miss out on informing potential investors or lenders of their viability and lose out on opportunities to gain more operating capital.