The income statement represents a company’s revenues, cost of goods sold, and expenses for a given period, with the company’s net profit being the bottom line. An income statement formula may be able to help the company create consistent statements month after month. Choosing the best income statement formula comes down to the inputs that go into the financial statement, the use of either a single-step or multistep income statement, and the end users who review and make decisions based on the information. Most national accounting standards have some guidelines on the preparation of income statements, though some flexibility is available. Small companies may need to consult certified public accountants (CPAs) when making this decision due to lack of accounting knowledge.
The amount and type of information that goes into the income statement can dictate the income statement formula used. For example, very small businesses may only need a few revenue lines and no cost of goods sold, which is more common on retail company statements. Manufacturing companies may have more detailed information that relates to cost of goods sold, which represents resources used on products that generate revenue. Either way, the inputs that go into the income statement most certainly dictate the income statement formula. Any alterations from a standard income statement format may need approval from a licensed CPA.
A single-step income statement is one that has few sections on it, with most information placed together in a few lines. For example, the revenue section only lists revenues and gains, while the expense section lists expenses and losses. The difference between the two sections is the net operating profit for a given period. Few other lines of information may be on this statement type as it is mostly a summary of succinct declaration of net profit. Smaller businesses and those with few revenue lines most likely use this income statement formula.
A multistep income statement outlines several lines in revenue and gains and expense and losses. Each section has a single summary total, where the difference between the two represents net profit. In most cases, there is no limit to the line items that may be on this income statement format.
A final factor that may affect the income statement formula used is the end users who make decisions on the information in the statement. Internal income statement users may need or desire more information on certain aspects on the company. External users may only need a summary of information rather than detailed analysis of financial operations.