Question

The income statement is a change statement. Explain what is meant by this. Briefly explain the difference between the single-step and multiple-step income statement formats. Distinguish between the direct method and the indirect method for reporting the results of operating activities in the statement of cash flows.

Answer 1

INCOME STATEMENT

Income statement is one of the three major financial statements in an organization/company. Income statement is prepared to know revenue, expenses, gains and losses of an organization during a particular period. It usually reports a company's financial performance over an accounting period.

? Income statement is a change statement . Usually, based on the nature of it's functions, income statement is treated as an change statement. Because it reports the changes in shareholder's equity occured during a particular accounting year. It will be done based on the treatment of revenue, expenses,gains and losses of the company. In other words, income statement is an flow statement which explains the changes in profit and losses of an business during a particular accounting year.

? Single-step and multi-step income statement format

SINGLE-STEP INCOME STATEMENT	MULTI-STEP INCOME STATEMENT
It offers simple report of business profit. It makes use of single equation for the net income calculation.	It is a three step process of net income calculation. It includes the seperation of operational revenues & expenses from non-operational revenues & expenses.
Doesn't break expenses in to categories like operating and non-operating nature.	It includes sepreration of operational & no-operational revenues and expenses of an organization.
It shows only net income of business.	It shows both the gross income and net income of business.
Usually it is small/shorter in size, since it includes single step.	It is broader than single-step format. since it includes numerous steps.
It offers a simpified snapshot on company's revenues and expenses.	It offers a wide explanation on revenue and expenses through it's categorization.
It doesn't deals with cost of goods sold. And generally used in the service-oriented organizations.	It deals with cost of goods sold and is more applicable in the merchandised organizations.

? Direct and indirect method of cash flow

DIRECT METHOD	INDIRECT METHOD
It deals with the changes in cash receipts and payments from operating activities. In short , under this format,the cash receipts and payments are reported directly.	Usually it starts with net profit or loss , then suitable adjustments are to be made to arrive at the profit or loss to get cash flow from operating activities.
It is also known as income statement method.	It is also known as net profit method or reconciliation method.
Cash flow from operating activities are computed on cash basis.	Cash flow from operating activities are computed on accrual basis.
It starts with cash transactions.	It makes use of net income as base.
Only cash based transactions are taken in to account.	It also includes non-cash transactions, like, depreciation.
Accurate report can be made.	Not accurate, since it includes adjustments.