Accounting: The Language of Business - Vol. 2 (Intermediate: Part 48)

I have been asked, politely and not so politely, why I am myself. This is an accounting any woman will be called on to give if she asserts her will.

Andrea Dworkin

Statements of Net Income and Comprehensive Income (Part F)

by

Charles Lamson 

Statement of Net Income Presentation

 There are two acceptable income statement formats:

• Multiple-step income statement format, which reports several critical subtotals before computing income from continuing operations (when discounted operations included) and net income.

• Single-step income statement format, which combines all revenues and gains and all expenses and losses into single categories.

The multiple-step income statement format provides more useful information for evaluating and predicting performance than the single-step net income statement because a multiple-step format clearly separates key performance measures. Income statement elements are commonly grouped by and subtotaled into key performance measures. Key performance measures on the statement of net income include:

1. Gross profit

2. Operating income

3. Income before tax (income from continuing operations before tax when discontinued operations included)

4. Income from continuing operations (when discontinued operations included)

5. Net income

6. Earnings per share

These subtotals help financial statement users evaluate past performance, predict future performance, and assess risks or uncertainties of achieving future cash flows.

Because a multiple-step income statement clearly separates the key performance measures, over 85% of U.S. companies use this format [AICPA, Accounting Trends and Techniques---2010 (New York, NY: AICPA, 2010)]. Therefore, we first focus our discussion on the multiple-step format and then describe the single-step format.

Multiple-Step Net Income Statement 

The multiple-step income statement contains five common sections for recording key performance measures. Exhibit 5.4 presents these five sections; we will discuss each of these in more depth in a later post.

EXHIBIT 5.4 Common Sections of a Multiple Step Net Income Statement

Exhibit 5.5 below provides a sample multiple-step income statement with the five sections highlighted by color as per Exhibit 5.4. The operating section is yellow and the non-operating section is green. The income tax provision is blue and discontinued operations is red. 

EXHIBIT 5.5 Multiple-Step Statement of Net Income

*GORDON, RAEDY, SANNELLA, 2019, INTERMEDIATE ACCOUNTING, 2ND ED. PP. 178-179*

end