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As a small business, you have two options for preparing an income statement — a single-step income statement or a multi-step income statement. Both types of income statements will show the profits, expenses, and revenues of your business for a given reporting period. However, a multi-step income statement offers a more in-depth analysis of your business’s financial performance.For many small businesses, the single-step income statement provides all the detail they need to assess the financial health of their companies. However, a multi-step income statement can be worth the extra time and effort it takes to prepare, especially if you’re thinking about applying for a loan or looking to attract an investor. Here’s a closer look at multi-step income statements vs. single-step income statements, including what each one includes, their pros and cons, examples, and why you might choose one over the other.
Multi-Step vs Single-Step Income Statements
Whether it’s multi-step or single step, an income statement is a key financial statement that shows how profitable your business was over a given reporting period. Both types of income statements show your revenue, minus your expenses and losses.However, that’s where the similarity ends. A single-step income statement uses a single equation (total revenues minus total expenses and losses) to arrive at net income. A multi-step income statement, on the other hand, follows a three-step process to calculate net income and separates operational from non-operational revenues and expenses. It also calculates gross income, which you won’t find on a single-step income statement.
Multi-Step Income Statements in Depth
The multi-step income statement uses multiple equations to determine the net income (profit) of the company and offers more details about the gains or losses of a business in a specific reporting period. Unlike a single-step income statement, it separates total revenue and expenses into operating and non-operating headings. It also calculates gross profit and operating income, which aren’t included on a single-step income statement.While the multi-step income statement takes more time and effort to prepare, it can help provide a detailed analysis of your company’s financial performance.
How Do They Work?
Multi-step income statements are so named because they use multiple equations (or steps) to calculate net income. Along the way, they calculate gross profit and operating income.There are three calculations involved:To calculate gross profit:Gross Profit = Net Sales – Cost of Goods SoldTo calculate operating income:Operating Income = Gross Profit – Operating ExpenseTo calculate net income:Net Income = Operating Income + Non-Operating Items
What Do They Include?
The multi-step income statement format separates a company’s operating revenue and operating expenses from its non-operating revenue and non-operating expenses. These statements include:
Net sales
Gross profit
Operating expenses
Operating income
Non-operating income and expenses
Net income
What Do They Indicate?
Multi-step income statements indicate how a company’s primary business activities generate revenue and affect costs compared to the performance of non-core business activities. These statements also tell you whether the company reported a profit or loss for the reporting period.
Multi-Step Income Statement Pros and Cons
Pros of Multi-Step Income Statements
Cons of Multi-Step Income Statements
Offer more detail about a business’s revenue and expenses than single-step income statements
Labor intensive
Report gross profit and operating income
Harder to read and understand at a glance than single-step income statements
Provide multiple ways to look at income and profit (operational vs. non-operational)
May not be necessary for some small businesses
Which Businesses Use Multi-Step Income Statements
Large businesses with multiple sources of revenue and many (and varied) expenses typically use a multi-income income statement. The reason is that this type of statement differentiates incomes and expenses from primary business activities with those from non-essential activities. However, any business (large or small) that is looking to bring in a new investor or get approved for a business loan can also benefit from issuing a multi-step income statement, since it provides greater financial detail about the business.Generally Accepted Accounting Principles (GAAP) gives public companies the option of issuing a multi-step or single-step income statement, depending on how they are structured.
Preparing Multi-Step Income Statements
To prepare a multi-step income statement, you need to select your reporting period (you might prepare these statements monthly, quarterly, or annually) and then follow these basic steps.
Add operating expenses. This includes the cost of goods sold, as well as other costs (such as advertising and administrative expenses).
Calculate gross profit. To do this, you subtract the cost of goods sold from the net sales.
Calculate operating income. You do this by subtracting operating expenses from gross profit.
Add non-operating revenues and expenses. This includes revenues and expenses from non-operating activities, including interest and the sale or purchase of investments.
Calculate net income. To do this, you add together your operating income and your non-operating items.
Here’s an example of a multi-step income statement for fictional company ABC.
Sales
$20,000
Cost of goods sold
$4,000
Gross profit
$16,000
Operating expenses
Selling expenses
Advertising
$3,000
Administrative expenses
Office equipment/Rent
$2,000
Supplies
$100
Total operating expenses
$3,600
Operating income
$12,400
Non-operating income and expenses
Gains on investments
$3.000
Interest on loan
($500)
Total non-operating income and expenses
$2,500
Net Income
$9,900
Single-Step Income Statements in Depth
Like a multi-step income statement, a single-step income statement reports the revenue, expenses, and profit (or loss) of a business during a specific period. However, it doesn’t provide the level of detail you get with a multi-step income statement. The single-step income statement calculates the business’s net income by subtracting losses and expenses from gains and revenue. It includes all expenses (including the cost of goods sold) in one column, rather than breaking them into subcategories like operating and non-operating expenses. While this statement doesn’t provide as much detail about a business’s financial performance, it’s easy to understand, relatively simple to prepare, and may be all you need if you’re simply looking to assess a company’s profits, or net income.
How Do They Work?
A single-step income statement presents information in a simplified format. It uses a single subtotal for all revenue line items and a single subtotal for all expense line items, with a net profit or loss appearing at the bottom of the report.The single-step income statement relies on one equation:Net Income = (Gains + Revenue) - (Losses + expenses)Unlike a multi-step income statement, the company's gross profit is not shown as a subtotal. In order to determine a company’s gross profit, someone reading the income statement will need to subtract the cost of sales from net sales.
What Do They Include?
Single-step income statements include:
All expenses
All losses
All revenues
All gains
Net Income
What Do They Indicate?
A single-step income statement tells you a company’s revenue and expenses for a reporting period and provides the firm’s “bottom line” — net income. In a simple, easy-to-read format, this type of income statement indicates whether the company is reporting a profit or a loss for the reporting period.
Single-Step Income Statement Pros and Cons
Pros of Single-Step Income Statements
Cons of Single-Step Income Statements
Easy to prepare
Offers limited information about a business’s financial performance
Not cluttered with multiple subtotals
No gross margin or operating margin calculation
Can see at a glance how well the business is performing financially
May not be sufficient for potential investors and creditors
Which Businesses Use Single-Step Income Statements
Single-step income statements are often used by companies that have a simple business structure, such as partnerships or sole proprietors. In general, a single-step income statement can be a good choice if your business doesn’t have complex operations and/or the need to separate operating expenses from the cost of sales. If all you need is a simple statement that reports the net income of your business, the single-step income statement may be sufficient.
Preparing Single-Step Income Statements
To prepare a single-step income statement, you need to select your reporting period (you might prepare these statements monthly, quarterly, or annually) and then follow these basic steps.
Add revenues and gains. This is all the income or money received by the business throughout the period. It includes income from the sales of products and services, as well any money received from non-primary activities, such as the sale of equipment or interest received.
Add expenses and losses. This includes the cost of goods sold (such as material cost, direct labor cost, and direct factory overheads), operating expenses (indirect costs associated with doing business, such as utilities, office supplies, and legal fees), non-operating expenses, and any losses.
Calculate net income. Once you have numbers for total revenues and total expenses, you subtract the expenses from the revenues to come up with net income for the reporting period. This number may be positive, negative, or zero (meaning total revenue is equal to total expenses).
Single-Step Income Statement Example
Here’s an example of a single-step income statement from fictional company XYZ.
Revenues and gains
Sales revenues
$10,000
Sales of assets
$700
Total Revenue and Gains
$10,700
Expenses and losses
Cost of goods sold
$2,000
Office supplies
$100
Advertising and marketing
$1,000
Interest
$300
Lawsuit Loss
$500
Total expenses and losses
$3,900
Net Income
$6,800
The Takeaway
Both single-step and multi-step income statements provide a summary of a company's revenues, expenses, and profits/losses over a given period of time. If you own a small business with a simple operating structure, you can choose whether you want to prepare a single-step or multi-step income statement.Single-step income statements are easier to prepare and may provide all the details you’ll need to assess the financial health of your company. However, if your small business is seeking any type of business loan or looking to attract a new investor, you may want to issue a multi-step income statement, since it provides more insight into your company’s financial performance.
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Frequently Asked Questions
How are single-step and multi-step income statements different?
What are the major sections of a multi-step income statement?
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About the Author
Lauren Ward
Lauren Ward is a personal finance expert with nearly a decade of experience writing online content. Her work has appeared on websites such as MSN, Time, and Bankrate. Lauren writes on a variety of personal finance topics for SoFi, including credit and banking.
