Format of the Income Statement
In a direct comparison of procedure, the single-step method of reporting for the Income Statement can be equated to the direct format of reporting for the Statement of Cash Flows; it is the most simple of the two available formats, it takes less time to prepare, but it provides less useful information. Sometimes, especially in a financial situation, the easiest method initially employed, is not the easiest method to dissect when information is needed on a piece-by-piece basis later.
The single-step statement is a recording of two groups of information: income and expense and the net result. Expenses are deducted from revenues, and no separation of operating activities or expenses is provided. The single-step method does not tie individual contributions to the area responsible for the contribution. In this way, it is as inconclusive as the direct format for the Statement of Cash Flows when it comes to accountability.
The multiple-step method, although a bit more complex, provides the more useful information simply because it separates the operating and non-operating activities and classifies revenue and expense accordingly. The end result is a better comparison of performance and ratio to ratio computations of the company's finances.
When a business uses the multiple-step method for reporting revenues and expenses, the items on the Income Statement are broken down as follows:
Sale of goods, merchandise, or services
Less Discounts and Allowances
Cost of Goods Sold
General and Administrative Expenses
Other Revenues or gains
Sources other than primary business activities
Other Expenses or Losses
Sources other than the primary business activities
Changes in Accounting Principle
Why is this so important? Well, the earnings per share information for stockholders comes directly from this computation, and since businesses have the option of reporting these earnings in two different formats, the additional information that the multiple-step Income Statement provides, will often shed light on the earnings per share figures, and whether the information is truly accurate, or if other items need to be considered when determining the real value of the earnings per share.
In addition, the multiple-step method incorporates the use of notes, and attached explanatory statements, that quite often the single-step method does not. As with the Statement of Cash Flows, most businesses prefer the more complex statement because of the additional information the statements provide. When you are trying to effectively utilize financial statements, quite often the supporting information provided by the more complex reports, allows the user to make more efficient use of the information now, and 6 months from now.
Although this article doesn't discuss them, there are even more complex Income Statements known as Consolidated Statements that are used by businesses that share interests and income across several different businesses, and have an ownership interest of more than 50%. However, for most beginners, and most small business situations, these Consolidated Statements are not something that will be used on a regular basis; in fact, most often you will be involved in corporate accounting information before the use of Consolidated Income Statements is a requirement.
Information is for educational and informational purposes only and is not be interpreted as financial or legal advice. This does not represent a recommendation to buy, sell, or hold any security. Please consult your financial advisor.