Question

What are the differences between a single-step income statement and the classified (multiple-step) income statement? What are the pros and cons of each?

Can you explain in a way a non accounting person would understand

Answer 1

Difference between single step income statement and multi step income statement

Income statement of a business means a statement which describe about the net income of the business, so a business prepare income statement to know the net income of the business for a certain period.

Income statement can be prepared in very detailed format and also in less detailed format as per requirement of users and the size of business. Single step income statement is short format of calculating net income of the business containing only revenue, gains, expenses and losses. It may contain these terms in a list but do not categorize them, means revenue and other items can be list out in single step income statement but cannot be categorized in any way. So we can say that single step income statement based on below mentioned equation

Net Income = (Revenues + Gains) – (Expenses + Losses)

On the other hand, A multi step income statement is prepared in a very detailed manner to explain and reveal many information about the net income of the business to the user of financial statements. In multi step income statement items of revenue and expenditures are not only listed out but also categorized in a manner to provide detailed information. For example revenue can be categorized in operating and non operating revenue, expenses in operating, non operating, abnormal expenses etc.

In a multi step income statement Gross Profit is to be calculated first which is based on below accounting equation

Gross Profit = Sales Revenue – Cost of goods sold (COGS)

After this operating income is to be calculated by subtracting all operating expenses from gross profit which can be interpret as below

Operating income = Gross Profit – operating expenses

And after that non operating income are added in operating income to calculate the net income of the business.

Net income = Operative income + non operative income

So, we can say that single step income statement is a summarized form of calculating net income whereas the multi step income statement is a detailed calculation of net income. Items are not categorized in single step statement whereas classified and categorized in multi step income statement.

Pros and cons

There is pros and cons of each type of income statement, a single step statement is a easy statement in comparison of multi step statement. Single step does not reveals so much information about the business operation it focus only on net income whereas multi step reveals very detailed information about the business operation. Single step statement only calculates net income of business whereas multi step income statement calculates gross profit, operating profit, net income. A user without detailed financial knowledge can read and understand the single step statement but user of multi step statement requires detailed financial knowledge to understand. Single step statement is only viable in case of small business but big business always requires multi step statement.

So above description describe about the differences between both type of statements and pros and cons of each.