Companies report profits earned on an income statement. While universal to all companies, there are two common income statement formats. The multi-step income statement provides a detailed analysis for each activity affecting profit. Single-step statements are less informational and provide the essential parts of profit-making activities. Each statement is customizable for different business operations.
A multi-step income statement has three parts. Sales revenue, operating expenses and non-operating revenue or expenses are the most common sections. Sales and cost of goods sold are in the first section. Selling and administrative expenses make up the second section. Non-operating activities include any non-repetitive profit activities, such as interest revenues, interest expenses and gains or losses on investment sales.
Single-step income statements reorganize all items into revenues and expenses. No distinction is necessary between operating and non-operating activities. For example, the revenue section includes sales, interest income and gains from the sales of investments. The expense section has a similar format. Selling and administrative items, interest expense and the loss on sale of investments all fall into this section.
While companies can use either statement, the multi-step income statement is most popular. Business stakeholders often find the multi-step statement more informative and easier to read. Publicly held companies will often use this format to meet reporting requirements set by accounting or government regulators. Small businesses can use the single-step income statement due to its simplicity. Small business owners typically prefer to look at the bottom line, disregarding creating a format to identify items for other financial statement users.
Multi-step income statements provide three benefits over the single-step income statement. First, companies can calculate gross profit easier. The difference between sales and cost of goods sold outlined in the statement is necessary for the calculation. Second, the statement lists operating income, which represents profit earned from regular business activities. Third, each section on the multi-step statement can have a positive or negative number. This provides more information for making business decisions.