Single-step statements give a simple overview of a company’s costs and earnings using a single equation.
What’s covered in the article
The single step income statement does not segregate revenue and expenses into sub-categories. Rather the information is given under a single column and offers a single report to the users of financial statements. Therefore, it is easy to prepare and understand. The computation of the net income is as follows:
Steps in Computation of Net Income using Single-step Income Statement
Step 1: Compute total revenue, including operating and non-operating revenues.
Step 2: Compute total expenses, including operating and non-operating expenses.
Step 3: Calculate net income with the given formula
Net income = Total revenue – Total expense
Components of a single-step income statement
Revenues (Net Sales)
Expenses
Gross profit
Format of Single-step Income Statement
| Particulars | Amount in $ | Amount in $ | |
| Sales revenues | XXX | ||
| Interest income | XXX | ||
| Profit on sale of assets | XXX | ||
| Other income | XXX | ||
| B | Total revenue | XXX | |
| Cost of goods sold | XXX | ||
| Interest expense | XXX | ||
| Loss from a lawsuit | XXX | ||
| Office expenses | XXX | ||
| A | Total expenses | XXX | |
| A-B | Net income | XXX |
Numeric Example
Mr. Individual runs a manufacturing business and has generated the following income for Q1 of 2022.
Revenue from sales $ 20,000
Interest income $ 11,800
Gain on sale of asset $ 2,200
It has also incurred the following expenses:
Cost of goods sold $ 15,500
Interest expense $ 5,000
Loss from a lawsuit of $1,750
Office expenses $ 1,500
Calculate net income based on the given information.
Solution:
| Particulars | Amount in $ | Amount in $ | |
| Sales | 20,000 | ||
| Interest income | 11,800 | ||
| Profit on sale of assets | 2,200 | ||
| B | Total revenue | 34,000 | |
| Cost of goods sold | 15,500 | ||
| Interest expense | 5,000 | ||
| Loss from a lawsuit | 1,750 | ||
| Office expenses | 1,500 | ||
| A | Total expenses | 23,750 | |
| A-B | Net income | 10,250 |
Pros of having a Single-step Income Statement
Easy record keeping
The single-step income statement is beneficial as it reduces the workload of an accountant and does not require a detailed breakdown of the revenue and expenses. It involves fewer calculations. Therefore, computation errors are less likely to occur in a single-step statement.
Simple to understand
Single-step income statements are well known for their simplicity as it only emphasizes the business’s net income. Its simplicity makes it easy for readers to understand financial reports.
Do not require financial expertise
The users of the financial statements do not require financial proficiency to understand the basic information about the business.
Cons of having a Single-step Income Statement
No detailed analysis
The single-step income statement is prepared in a simplified snapshot. Every business involves a fair chance of risk. Too little information can raise problems for investors since greater financial detail is difficult to achieve.
Hindrance in decision making
Since a single-step income statement does not provide detailed information on the gross margin and operating margin in a reporting period, a lack of reliable data can be a major hindrance in apt decision-making.
No differentiation between operating and non-operating activities
Single-step income statement does not differentiate between
a. Operating revenues and non-operating revenues
b. Operating expenses and non-operating expenses
When to use it?
Small businesses like sole-proprietors or partnership firms may opt to use single step income statement or multi-step income statement. The small businesses that do not have complex business operations can prepare single-step income statements because it is a time-savvy process.
Multi national companies having numerous divisions actively use single-step income statement for their internal reporting to analyze divisional performance.
However, where the business decides to get bank loans or new investment for their expansion multi step income statement is the best option as it provides detailed insights into the entity’s financial stability.
Most of the publicly traded companies create multi step income statement as they are complex business entities.
Investors, analysts and various other stake holders also prefers multi step income statement as they present more information as compared to single step format.
Single-step Vs Multi-step Income Statement
| Single-step income statement | Multi-Step income statement |
| It is easy to prepare | Take time for preparation |
| The single-step format uses a single equation to arrive at the net income. | The multi-step format uses a three-step process to arrive at the net income. |
| Lack of detailed information like information on operating and non-operating items. | It provides detailed information on every aspect of the income statement. |
| It is Ideal for small businesses that do not have complex operations. | It is ideal for complex businesses like listed companies, multinational companies, entities that aim to attract new investments, etc. |
Conclusion
Single-step income statement offers a simple layout that involves hassle-free preparation. It does not provide a detailed analysis of the operations but is ideal for businesses not having complex operations. The financial reports prepared using the single-step income statement are crisp and clear about the firm’s profitability. Therefore, companies that opt to simplify their accounting process may prepare the single-step income statement.
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