Question

Can you explain how multiple-step and single-step income statements differ ?

Answer 1

Solution:

Single-step income statements
A single-step income statement uses a single calculation to compute company's net income. It simply adds all of the revenue from its business activities, as well as any other gains, such as from investments or interest income. Then, any expenses and losses are added up and are subtracted from the revenue/gains, to calculate the net income.

Multiple-step income statements
On the other hand, a multiple-step income statement offers a more deep look at a company's performance. Not only multiple-step income statement contain an itemized list of revenue and expenses, it also breaks down the numbers into operating revenue and expenses that result from the company's primary business activities, and non-operating items, which aren't directly related to the company's business.

In addition to calculating net income, a multiple-step income statement uses intermediate steps (hence the name) to calculate the company's gross profit and operating income, two metrics which can be especially useful for prospective investors to compare the performance of similar companies.

The first calculation on a multiple-step income statement subtracts the cost of goods sold (COGS) from the net sales, which produces the gross profit.

The second calculation subtracts the company's operating expenses, such as office supplies and advertising costs, to arrive at the operating income.

Finally, by adding or subtracting the total of the company's non-operating items, we can arrive at the net income, which represents the actual amount of money a company made during the time period.