An income statement, also known as a profit and loss statement, demonstrates a company’s financial performance during a defined period of time such as a month, quarter or year. An accountant typically chooses either a multiple-step or single-step format when preparing an income statement, depending on the amount of detail he must include in the statement. A person can calculate meaningful financial ratios from numbers revealed on a multiple-step income statement.
Single-Step Income Statement
A single-step income statement reveals a company’s bottom line, or net profit or loss, by demonstrating one mathematical equation. A single-step income statement shows that a company’s bottom line equals the total of its revenues and gains, minus the company’s aggregate expenses and losses -- or net income = (revenues + gains) – (expenses + losses). A single-step profit and loss statement does not separate a company’s income or expenses by type. A single-step income statement only itemizes income and expenses that result from accounting changes, extraordinary events or suspended operations above a company’s net profit or loss.
Multiple-Step Income Statement
Compared to a single-step profit and loss statement, a multiple-step income statement includes more detail by itemizing a company’s different sources of income and expenses. Before revealing a company’s net profit at the bottom of the income statement, a multiple-step income statement displays the company’s gross profit and operating profit.
A multiple-step income statement calculates a company’s gross profit by subtracting its cost of goods sold, or costs directly related to the company’s production of goods or services, from the company’s sales revenue. A multiple-step income statement displays a list of a company’s operating expenses below the company’s gross profit. Subtracting the total of a company’s operating expenses from its gross profit reveals the company’s operating income. A multiple-step income statement lists interest collected by a company and any interest or taxes paid separately below the company’s operating income. A multiple-step income statement includes income or expenses related to accounting changes, extraordinary events or suspended operations in this section as well. The total of a company’s other, or non-operating income, plus the company’s operating income equals its net income or loss.
Because a multiple-step income statement includes comparatively detailed information, a person can calculate various ratios using the document that he cannot calculate by reviewing a single-step profit and loss statement. These ratios include a company’s gross margin and profit margin. A company’s gross profit divided by its sales revenue equals the company’s gross margin. Dividing a company’s net income after taxes by its sales revenue reveals the company’s profit margin.
Earnings Per Share
A publicly traded company's income statement must display how much of the company’s net income is attributable to each share of stock, or the company’s earnings per share. A company’s earnings per share equals the company’s net income divided by the total number of shares outstanding.
- Accounting Coach; Income Statement; Harold Averkamp
- Reference for Business: Income Statements
- Reference for Business; Income Statement; Charles Woelfel and Karl Heil
- U.S. Securities and Exchange Commission; Beginners' Guide to Financial Statements; February 2007
- Accounting Coach; Financial Ratios; Harold Averkamp
- Randall W. Luecke and David T. Meeting. "How Companies Report Income: The FASB introduces new rules for comprehensive income." Journal of Accountancy, May 1998.
Deborah Barlowe began writing professionally in 2010. With experience in earning securities and insurance licenses and having owned a successful business, her articles have focused predominantly on finance and entrepreneurship. Barlowe holds a bachelor’s degree in hotel administration from Cornell University.