Accounting: The Language of Business - Vol. 2 (Intermediate: Part 50)

Just as black anger often proved counterproductive, so have these white resentments distracted attention from the real culprits of the middle class squeeze - a corporate culture rife with inside dealing, questionable accounting practices, and short-term greed.

Barack Obama

Statements of Net Income and Comprehensive Income (Part H)

by

Charles Lamson

Single-Step Statement of Net Income

Approximately 15% of reporting entities use a single-step format, which combines all revenues and gains and all expenses and losses into single categories [Based on a survey reported in AICPA, Accounting Trends and Techniques---2010 (New York, NY. AICPA, 2010)]. Net income is arrived at in a "single step" by subtracting aggregate expenses and losses from aggregate revenues and gains. Exhibit 5.9 below presents a sample single-step net income statement.

EXHIBIT 5.9 Single-Step Statement of Net Income

There are several drawbacks to the single-step format that limit the transparency of information for financial statement assets:

• It combines revenues and gains and expenses and losses without classification.

• It does not separate operating and non-operating items.

• It does not classify expenses by function, such as selling expenses and general and administrative expenses.

• It does not identify key performance measures.

Exhibit 5.9 illustrates the shortcomings of the single step format. Puppini combines operating and non-operating items. Specifically total revenues and gains include sales revenue (operating) and interest income (non-operating revenue). The single-step statement also fails to separate items by function. For example, the cost of goods sold is a critical part of Puppini's manufacturing function, and sales salaries and advertising expenses are part of the selling function. Finally, Puppini's net income statement does not include key performance measures such as gross profit and operating income (The information needed to compute these key measures are in fact included on a single-step and net income statement. However, additional computations are required by the financial statement user to derive gross profit and operating income, resulting in added complexity for the average statement reader. )

*GORDON, RAEDY, SANNELLA, 2019, INTERMEDIATE ACCOUNTING, 2ND ED., PP. 181-182*

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