An income statement summarizes a company's financial performance. It shows all revenues and expenses of the company over a specific period of time.
There are two ways of presenting an income statement. You can either present a (1) single-step income statement, or (2) multi-step income statement.
A multi-step income statement is more organized but more complicated than the single-step format. Let's take a look at how each would look like.
| ABC Company | ||
| Income Statement | ||
| For the Year Ended December 31, 2021 | ||
| Revenues and Gains: | ||
| Sales | $ 120,000 | |
| Interest Income | 6,000 | |
| Gain on Sale of Investments | 5,000 | |
| Total Revenues and Gains | $ 131,000 | |
| Expenses and Losses: | ||
| Cost of Sales | $ 62,000 | |
| Salaries Expense | 18,000 | |
| Utilities Expense | 10,000 | |
| Supplies Expense | 8,000 | |
| Depreciation Expense | 5,000 | |
| Advertising Expense | 2,000 | |
| Loss on Sale of Equipment | 1,000 | |
| Total Expenses and Losses | $ 106,000 | |
| Income before Tax | $ 25,000 | |
| Less: Income Tax Expense | 9,750 | |
| Net Income | $ 15,250 | |
A single step income statement is quite straightforward. All revenues and gains are presented first, followed by all expenses and losses. The difference is computed and subjected to income tax to get the net income.
| ABC Company | |||||
| Income Statement | |||||
| For the Year Ended December 31, 2021 | |||||
| Sales | $ 120,000 | ||||
| Less: Cost of Sales | 62,000 | ||||
| Gross Profit | $ 58,000 | ||||
| Less: Operating Expenses | |||||
| Selling Expenses | |||||
| Salaries Expense - Sales | $ 10,000 | ||||
| Utilities Expense - Store | 5,000 | ||||
| Store Supplies Expense | 4,000 | ||||
| Depreciation Expense - Store | 2,000 | ||||
| Advertising Expense | 2,000 | $ 23,000 | |||
| Administrative Expenses | |||||
| Salaries Expense - Office | $ 8,000 | ||||
| Utilities Expense - Office | 5,000 | ||||
| Office Supplies Expense | 4,000 | ||||
| Depreciation Expense - Office | 3,000 | 20,000 | |||
| Total Operating Expenses | $ 43,000 | ||||
| Operating Income | $ 15,000 | ||||
| Other Revenues and Expenses | |||||
| Interest Income | $ 6,000 | ||||
| Gain on Sale of Investments | 5,000 | ||||
| Loss on Sale of Equipment | (1,000) | 10,000 | |||
| Income before Tax | $ 25,000 | ||||
| Less: Income Tax Expense | 9,750 | ||||
| Net Income | $ 15,250 | ||||
In a multi-step income statement, several steps are taken before we could arrive at the net income. We need to sequentially compute for:
First, the gross profit is computed by deducting cost of sales from sales. Then, all operating expenses are presented. Operating expenses include selling expenses and administrative expenses.
Note: Some expenses are related partly to sales and partly to administration. When presenting selling expenses separately from administrative expenses, the "partly" expenses should be allocated using a reliable basis.
Gross profit minus operating expenses will give us the operating income. Then, we incorporate other revenues and expenses to come up with the income to be subjected to tax. After deducting the tax, we finally have the net income.
An income statement provides information regarding the "results of operations" of a business, or otherwise known as "financial performance".
Income statement may be presented using the single-step or multi-step approach. A multi-step income statement shows more details and is more commonly used.
