Single-Step vs. Multiple-Step Income Statements: An Overview
An income statement is an essential financial document a company prepares to describe its business activities over a given reporting period. This financial summary of a company's revenue, expenses, and earnings are typically presented as part of a package that also includes a company’s balance sheet and cash flow statement.
All publicly-traded companies in the U.S. must adhere to Generally Accepted Accounting Principles (GAAP), which are accounting standards issued by the Financial Accounting Standards Board (FASB). Many private companies elect to follow GAAP, even though they aren’t legally obligated to do so. In any case, GAAP gives companies the option of issuing either single-step or multiple-step income statements, depending on how they’re structured. Each type of income statement presents both advantages and disadvantages.
- Single-step and multiple-step are two ways that companies complying with GAAP accounting standards can report income statements.
- Multiple-Step statements provide an in-depth look at a company's financial health, offering details about the company's wellbeing.
- On the downside, these detailed statements are labor-intensive to produce and can be overwhelming for some investors to sort through.
- Single-step statements offer a basic look at a company's revenue and expenses, making record-keeping easier for accountants and investors.
- But on the negative side, these income statements are so streamlined that they lack context, and don't include key metrics such as gross margin and operating margin data.
Single-Step Income Statements
A single-step income statement offers a simplified snapshot of a company’s revenue and expenses. This straightforward document merely conveys a company’s revenue, expenses, and bottom-line net income. All revenues and gains are totaled at the top of the statement, while all expenses and losses are totaled at the bottom. This simplified approach makes record-keeping easier for both the accountants who prepare the statements and the investors who read them. Shareholders need only focus on the net income figure, to gauge a company's overall vitality.
Disadvantages of Single-Step Statements
On the other hand, some investors may find single-step income statements to be too thin on information. The absence of gross margin and operating margin data can make it difficult to determine the source of most expenses and can make it harder to project whether a company will sustain profitability. Without this data, investors may be less likely to invest in a company, causing businesses to miss out on opportunities to acquire operating capital.
Multiple-Step Income Statements
Most publicly-traded companies use multiple-step income statements, which categorize expenses as either direct costs (also known as non-operational costs), or indirect costs (also known as operational costs). Direct costs refer to expenses for a specific item, such as a product, service, or project. Contrarily, indirect costs are generalized expenses that go towards a company’s broader infrastructure, and therefore cannot be assigned to the cost of a specific object. Examples of indirect costs include salaries, marketing efforts, research and development, accounting expenses, legal fees, utilities, phone service, and rent.
The siloed breakdowns in multiple-step income statements allow for deeper analysis of margins and provide more accurate representations of the costs of goods sold. Such specificity gives stakeholders a sharper view of how a company runs its business, by detailing how the gross, operating, and net margins compare.
Multiple-step income statements are used by most publicly-traded companies.
Disadvantages of Multiple-Step Statements
On the downside, multiple-step income statements can be labor-intensive for accounting teams to produce, because of the granularity involved in managing and recording copious data. Case in point: under this method, each type of revenue and expense must be diligently categorized and each transaction must be fastidiously recorded. Any mistake could cause investors to make errant assumptions about the company, which could negatively impact the business.