3.3 Income Statement Formats: Single-Step vs. Multi-Step

Income Statement Formats

Two options are allowed by FASB for reporting the income statement:

• Single-step income statement
• Multi-step income statement

Single-Step Income Statement

• Groups together all revenues, other revenues, and gains to arrive at total revenues and gains.
  • Revenues: From principal ongoing operations.
  • Other revenues and gains: From secondary activities.
• Deducts total expenses and losses from total revenues and gains.
  • Groups together operating expenses from principal ongoing operations with other expenses and losses that are infrequent.
• Drawbacks:
  • Does not distinguish between operating and non-operating income.
  • Less useful for analysis because all revenues and expenses are grouped together.
  • Does not change the net income amount, but reduces usefulness for users.

Multi-Step Income Statement

• Preferred format.
• Separates operating and non-operating activities.
• Classifies expenses by function (product cost, selling cost, administrative expense).
• Operating Section:
  • Net sales revenues: Sales revenues less sales returns, sales allowances, and sales discounts.
  • Subtract cost of goods sold to get gross profit.
  • Identify different classifications of expenses such as marketing, administrative, and general expenses.
  • Income from continuing operations: A reliable number to forecast future performance.
• Non-Operating Section:
  • Categorizes non-operating events that occurred in the current year (unusual or non-recurring).
  • Includes secondary sources of revenues.
  • Gains on the sale of long-term assets or gains on unusual or non-recurring events.
  • Other expenses and losses:
    • Interest expense.
    • Losses due to the sale of long-term assets (plant, property, equipment, investments).
    • Losses on unusual or non-recurring events.
• Examples of items in the non-operating section:
  • Impairment loss.
  • Gains and losses on foreign currency transactions.
    • Example: Walmart has a supplier in Japan who wants to get paid in Japanese yen. The exchange rate on the date Walmart receives the goods and records the liability may differ from the exchange rate when Walmart pays the supplier 30 days later. This difference creates a gain or loss on the foreign currency transaction.
  • Gain or loss on the early retirement of debt.
  • Loss due to a casualty.
  • Gain or loss due to an expropriation.
    • Expropriation: Forced sale of assets to a government authority.
    • Example: Verizon was forced to sell its assets in Venezuela to the government when Venezuela decided to take control of all telecommunications activities within the country.
  • Restructuring charges:
    • Costs incurred when a company is trying to cut costs.
    • Example: Macy's closing unprofitable stores, incurring costs to get out of leases, legal costs, and severance packages for laid-off employees.
  • Costs due to labor union strikes.
• Benefits:
  • More useful for end-users to predict future company performance.
  • Breaks down between operating and non-operating activities.
• Taxable Income Calculation:
  • Revenues and expenses from operating and non-operating activities give a subtotal of taxable income (income before taxes).
• Income Tax Expense Disclosure:
  • A required disclosure.
  • Shows how much income tax expense is associated with the income generated during the year.
  • Follows intra-period tax allocation, showing tax associated with ongoing activities and unusual or non-recurring events.
• Income from Continuing Operations:
  • Subtotal after deducting income tax expense.
• Discontinued Operations:
  • Only shown if there are discontinued operations.
  • If no discontinued operations, income from continuing operations becomes net income.
  • Reported net of tax (after subtracting out the tax effect).
• Net Income:
• Non-controlling Interest:
  • If the company is a parent company with less than 100% ownership of subsidiaries, this is subtracted to get net income attributable to the parent company.
• Earnings per Common Share:
  • The very last disclosure on the income statement.
• Overall Benefit of Multi-Step Format:
  • Easier for analysts to assess trends in revenue from continuing operations versus non-recurring items.