Question

explain different methods of presenting analysis of expenses and how we should choose these methods for application in company

Answer 1

There are two methods through which a person can analyze expense and income, basically called Income Statement.

1. Single Step Income Statement: Single step Income statement is a simplified form of presentation of income and expense. Under this method expenses and losses are subtracted from the revenue and gains and NET INCOME is computed. This is basically used by small business firms.

The main disadvantage of this method is that it does not have detailed information. Due to the lack of detailed information, business owners are not able to take important financial decisions.

The advantage of this method is that it is easy to prepare and focuses on net income of the business.

2. Multi Step Income Statement: Multi Step Income Statement is a detailed income statement. It divides the expenses and revenue as operating and non operating. This method is prescribed to a business enterprise to use to prepare the income statement as this provides the detailed and required information to a user. Users may be owners, investors, shareholders, creditors, etc.

While using Single Step method a person directly calculates NET INCOME but in case of Multi Step Gross Profit is also calculated which is beneficial for users to calculate company's Gross Margin.

The disadvantage of this method is that it is complex and time taking process as compared to Single Step Method.

How Should We Choose:

If an organization is a small business firm like sole proprietor, partnership can choose any type of method and prepare their Income Statement and further share with the potential users. But in case of large organizations or public listed companies it is advised to prepare the income statement as per Multi Step method because it segregates the expenses into different parts which is helpful for the potential users to evaluate the performance of the business organization.