Question

What are the major advantages and disadvantages of the single-step form of income statement compared to the multiple-step income statement? Can a business incur a gross profit but incur a loss?

Answer 1

A single-step income statement gives a simple accounting of a business’s net income, whereas a multi-step income statement follows a three-step process to calculate net income, separating operational from non-operational revenues and expenses.

ADVANTAGES OF SINGLE-STEP INCOME STATEMENTS

Easy to Prepare: Because single-step income statements require you to make fewer calculations and because they don’t break down operating versus non-operating line items, single-step reports take less time and effort to prepare.

Easy to Read: The single-step income statement is a streamlined document. It focuses on the bottom line, net income, so it’s easy to see at a glance how well the business is performing financially

Disadvantages of Single-Step Income Statement Format

It only gives a basic and a simplistic view of the company’s financials for a given period, therefore it might not be enough for the more sophisticated investors for making the analysis and decisions.

It does not reveal any data about gross margins or operating margins. Thus, making it difficult to identify the source of expenses and to make any accurate future projections about them.

It does not make a distinction between the primary activities of the company and the income from some other sources. It treats them all under the category of “revenues”, thus may leading to misunderstanding or misinterpretation of information by the investors.

2. Yes.

A business can incur a gross profit but incur a loss.

Gross profit is the excess of (net) sales over cost of merchandise sold. A net loss arises when operating expenses exceed gross profit. Therefore, a business can earn a gross profit but incur operating expenses in excess of this gross profit and end up with a net loss.