What are the advantages of multi step income statement over single step income statement?
When it comes to preparing an income statement, the businesses have two options. The two options are a single-step income statement or a multi-step income statement. And they are free to opt for any of the statements. Because the end result of the two options remains the same. The difference is only in the structure of the two methods. To know the option that is best for your firm, it is crucial that you know the differences between Multi-Step vs Single Step Income Statements. Show
Such a statement gives a simple view of the company’s profit or loss. In this, we use a single equation to come up with the profit or loss. This method reports revenue, expenses, and profit or loss, but it does so in a single equation. In this, we total all revenues and expenses and subtract them from each other to get the net income. We total all revenues (and gains) at the top of the statement, and then we total all expenses (and losses). Table of Contents
This method uses the following equation: Net Income (or Loss) = (Revenues + Gains) – (Expenses + Losses) The biggest advantage of this method is that it is easy to understand and use and is pretty straightforward. Multi-Step Income StatementIn a multi-step income statement structure, a specific segregation/split is made between the revenue and expenses on the basis of whether they belong to the operational and non-operational stream. Under this method, there are three steps to calculate the net income or loss for a company. Like the single-step, this method also shows and uses all the information. But, it uses more than one equation to come up with the profit or loss for the company. Since it differentiates between the operational and non-operational revenues and expenses, it classifies the expenses that could be directly linked or relatable to the business’s operations from those that do not relate directly. Basically, it uses three equations to come up with the net profit or loss for a business:
Advantages of Multi Step Income Statement over Single StepFollowing are the advantages of a single-step income statement: Easy to PrepareIt is very easy to prepare since it takes fewer calculations and doesn’t split operational and non-operational revenue and expenses. Moreover, it involves the use of just one equation. Easy to ReadSince it is concise and uses just one equation, the single-step income statement is very easy to read. Just a glance will give a user all the information they need. Following are the advantages of a multi-step income statement: More DetailsIn this, one splits the revenue and expenses into operational and non-operational streams. This gives a better insight into the financial position of a business and the impact of non-operational items in the performance of the business. Gross ProfitThis method helps find the gross profit, in contrast to the single-step income statement. GP is a crucial financial metric as it tells whether or not the company is efficiently using direct material and labor. Making loss or not generating enough margins at a GP level is quite a serious issue for smooth operations. Operating IncomeThis method also informs of the operating income or loss along with gross profit. This gives an idea of how well a business uses its primary/core business activities to make an earning. Multi-Step vs Single Step Income Statement – DisadvantagesFollowing are the disadvantages of the single-step income statement:
Following are the disadvantages of the multi-step income statement:
Multi-Step vs Single Step Income Statement – ExampleSuppose a business has the following heads: Sales $50,000; Interest earned $2500; Profit from asset sale $1500; COGS $37,500; Commission expense $2,500; Office supplies $1,750; office equipment expense $1,250; Advertisement $1,000; Interest expense $250; and loss from lawsuit $750. Single Step Income Statement
Multi-Step Income Statement
Which Should One Use?If your business is small, or you operate via sole-proprietorships and partnerships, then you can go for either of the two methods. But, if your business is big or the number of transactions is large, then you must go for the multi-step income statement. Almost all public companies use the multi-step income statement to report their net income. Also, if a company plans to go for a debt or get new investors, then a multi-step income statement is the right option. This is because it would give stakeholders a true idea of the financial health of the business. RELATED POSTS
What is a major advantage of the multipleMajor advantage of a multiple-step income statement over a single-step income statement. the multiple-step income statement shows the relationship of gross profit to sales.
What are the advantages of the singleAdvantages of Single-Step Income Statement
The simplified statement shows expenses in a single line for net income, rather than breaking up the results by gross profit and operating profit. This approach makes the record-keeping task much easier for the accountants who prepare the statements.
What is an advantage to using a multiWhat is an advantage of using the multiple-step income statement? It highlights the components of net income.
What is the difference between single and multiIn contrast, a multi-step income statement uses three steps to compute the net income and separates the non-operational and operational revenues and expenses. A single-step income statement lists the revenue and expenses and uses this information to calculate the net income or net loss.
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