When gauging the performance of small businesses, the company’s income statement helps illustrate profitability, major total expenses, and business activities and trends. The level of detail needed on an income statement varies depending on the circumstances and report users. The single-step income statement format is the simplest format and has advantages relative to the multi-step statement, especially for a sole proprietorship.
Overview
The simplicity of the single-step income statement revolves around the categories of revenue and expense line items. Revenue is displayed as a single line item, while a select group of expenses is displayed in a single expense section. Net income is displayed beneath revenue and expenses and is easily discernible, which facilitates percentage and ratio analysis. The single step focuses on the bottom line.
Single Step Vs Multi Step Income Statement
While the single-step statement has revenue, accounting expenses, and net income, it doesn’t have the level of detail the multi-step statement does. For example, operating and non-operating items are separated on the multi-step income statement. The multi-step format breaks down operating revenues and operating expenses. The multi-step revolves around a company’s gross profit. Other line items, such as the cost of goods sold (cogs), are displayed differently on each statement. Users of financial statements must decide whether the single-step or multi-step format is more useful, depending on the type of analysis being performed.
Advantages Of The Single Step Income Statement
When determining gross margin, net profit margin, and other important profitability metrics, the single-step income statement is helpful. The aggregated information is conducive to vertical and horizontal analysis, along with comparative analysis against competitors.
- A quick analysis of profit and loss
- High-level indication of business trends
- Easy to read and analyze
- Fast calculation of margins and performance
The equation for the single-step format is:
Net Income = (Revenues + Gains) – (Expenses + Losses)
Disadvantages Of The Single Step Income Statement
Detailed analysis of specific expenses can become difficult when using a single-step income statement. Spotting opportunities for improvement, or seeing surges in specific expenses, becomes blurred when aggregating expense line items. For enterprise-level decision-making, single-step statements are useful but have less utility, for improvement of operational efficiency. e
- Less visibility of cost drivers
- Difficulty pinpointing departmental inefficiencies
- Limited root cause analysis
- Difficulty adjusting specific operational objectives
When reviewing the income statement, simplicity can be an advantage when it comes to aggregating similar line items. It allows for a high-level review and analysis that gives leadership feedback on their short and long-term operational strategies, along with information regarding profitability and sales growth. Formulating financial information into meaningful reports is essential for effective decision-making.
Resources:
https://www.sec.gov/reportspubs/investor-publications/investorpubsbegfinstmtguidehtm.html