Analysis of Financial Statements

Multi-Step Income Statement

Unit 2.2
Multiple-Step Income Statements

• Most publicly-traded companies use multiple-step income statements, which

categorize expenses as either direct costs (also known as non-operational
costs), or indirect costs (also known as operational costs).
• Direct costs refer to expenses for a specific item, such as a product, service or
project.
• Contrarily, indirect costs are generalized expenses that go towards a company’s
broader infrastructure, and therefore cannot be assigned to the cost of a specific
object. Examples of indirect costs include salaries, marketing efforts, research
and development, accounting expenses, legal fees, utilities, phone service, and
rent.
Single-Step Income Statements
• A single-step income statement offers a simplified snapshot of a company’s
revenue and expenses.
• This straightforward document merely conveys a company’s revenue, expenses,
and bottom-line net income.
• All revenues and gains are totaled at the top of the statement, while all expenses
and losses are totaled at the bottom.
• This simplified approach makes record-keeping easier for both the accountants
 who prepare the statements and the investors who read them.
• Shareholders need only focus on the net income figure, to gauge a company's
overall vitality.
• On the other hand, some investors may find single-step income
statements to be too thin on information.
• The absence of gross margin and operating margin data can make it
difficult to determine the source of most expenses and can make it
harder to project whether a company will sustain profitability.
• Without this data, investors may be less likely to invest in a
company, causing businesses to miss out on opportunities to acquire
operating capital.
Single step income statement