Financial statements of the company hold tantamount value in terms of stakeholders, as well as internal decision-makers of the company. Factually, it can be seen that financial statements are resourceful because they hint regarding the profitability and the performance of the company. Therefore, preparation of the financial statements tends to be one of the most primitive tasks for organizations at the year-ends.
There are mainly two types of Income Statements that are prepared by companies. They include single-step income statements and multiple-step income statements. They are different in terms of presentation, and disclosure of different line items. The explanation for these types of income statements is given in the next section.
Definition of Single Step Income Statement
A single-step income statement can be defined as an essential document that a company prepares in order to describe its activities over a given period of time. It is a depiction of the financial summary of the company’s revenue, as well as expenses as well as net earnings that are made over the course of time. Sometimes, these figures are typically represented as a percentage as part of the package that includes the company’s balance sheet, as well as cash flow statement.
Therefore, it can be seen that a single-step income statement can be defined as a financial statement format that enlists all expenses that include revenues, and the cost of goods sold in a single column. It does not break expenses into different categories (like Cost of Goods Sold, Operating Expenses, etc.).
However, all these expenses are listed together and totaled.
Explanation of Single Step Income Statement
A Single Step Income Statement offers a simplified snapshot of the revenues and expenses of a company. This document mostly reflects the revenue of the company, as well as its expenses, and the bottom-line income. In the same manner, all revenues and expenses are also depicted in a consolidated form, at the top of the statement. On the other hand, all expenses and losses are mentioned at the bottom.
This simplified approach helps to make records easier, and more convenient for accountants who prepare financial statements, as well as the investors who rely on this information for decision making. From the shareholder’s perspective, it can be seen that they are most interested in the profitability of the company, and therefore, they focus solely on the net income figure, in order to gauge the overall performance of the company.
The equation that is used when preparing a single-step income statement is as follows:
Net Income = (Revenue from sales + Other Revenue or gains) – (Losses + Expenses)
As per the equation above, it can be seen that single-step income statements calculate the net income of the business by subtracting losses and expenses from gains and revenue. Given the fact that these statements are not segregated in terms of gross margins and net margins, it is difficult to analyze the companies in terms of cost.
Types of companies that use Single Step Income Statement
Some small-sized companies, like sole traders, or partnership firms often rely on single-step income statements. This is primarily because of the fact that single-step income statements are easier to prepare and analyze from the perspective of the company. For example, a small mobile retailer is likely to use a single-step income statement because the cost breakdown and the revenue outlay are quite similar.
On the contrary, a mobile phone manufacturer might not find it feasible to use a single-step income statement, because a lot of important information is likely to be missed out as a result.
In the same manner, larger companies, which are publicly listed cannot solely rely on single-step income statements. This is because they are required by law to ensure that their financial statements are presented in detail to ensure compliance, and protect the laws of the shareholders.
Hence, to summarize, single-step income statements are helpful for the following companies:
- Where companies need a simple income statement, just to calculate the profitability of the company.
- The business does not involve any complex operations.
- There is no need to separate operating expenses from the cost of sales, i.e. there is no need for the company to calculate the gross margins.
Single Step Income Statement Vs. Multiple Step Income Statement
Where on one hand, a single-step income statement offers a simplified view of the revenues and expenses of the company, a multiple-step income statement is different.
A multiple-step income statement is used by almost all publicly traded companies, which use this particular income statement in order to categorize expenses as either Direct Costs, or Indirect Costs.
Direct Costs refer to expenses for a given item, including product costs, or costs that can be directly attributable to a given product.
On the other hand, indirect costs are generalized costs that are cannot be attributed to the single products of the company. Examples of indirect costs include salaries, marketing, and development, accounting expenses, as well as rent.
This breakdown of costs into categories and types helps the users of financial statements to ensure that they are able to get a clear-cut idea regarding the expense breakdown, and how much expenses are incurred against the earned revenues for a given period.
Hence, it facilitates a sharper view of how the company runs its business and further enlists the gross operating, and net margins.
Limitations of Single Step Income Statements
Despite the fact that single-step income statements are resourceful in terms of quickly highlighting the performance of the company over the course of time, it can be seen that there are certain limitations associated with these statements that need to be accounted for.
These limitations are as follows:
- Single Step financial statements often miss out on important information: Factually, it can be seen that single step financial statements often lack depth of information that can be solely relied on for decision making by companies. The fact that there is no cost of goods sold, gross margin, or a detailed breakdown of operating expenses imply that the decision makers cannot identify about any other cost components. They just have an idea regarding the profitability of the company, that can be used for be comparison related purposes.
- Difficult to identify setbacks: Since single step financial systems mostly incorporate less information, it is difficult for organizations (and decision makers) to identify what went wrong. For example, if expenses are higher one year as compared to another, there is insufficient evidence to reason why this change happened in the first place.
Example of Single Step Income Statement
The concept of Single Step Income Statement is illustrated in the following example:
Jigger Co. is a trading concern with the following balances as of 31st December 2020:
- Revenue: $100,000
- Opening Inventory: $10,000
- Purchases: $20,000
- Closing Inventory: $15,000
- Cost of Goods Sold: $15,000
- Operating Expenses: $30,000
- Rent: $15,000
- Salaries: $20,000
Since Jigger Co. is a small trader, the owner of Jigger Co., finds it sufficient to use a single-step income statement to gauge the profitability of the business.
The single-step income statement for Jigger Co. is given below:
|Cost of Goods Sold||$15,000|
|Wages and Salaries||$20,000|