discussion response

When preparing financial statements, there are single step financial statements and multi$-$step financial statements.

In a single step income statement, all revenues are combined into one section and all expenses are combined into one section. In a single step income statement operating items and non$-$operating items are not separated.

A multi$-$step income breaks down income into several sections $($listed from top down$)$:

Revenue and cost of goods sold $($Revenues$-$Cost of Goods sold$=$gross profit$)$

Operating Expenses $($Gross Profit minus operating expenses$=$operating income$)$

Nonoperating Items $($Operating Income $+-$ Nonoperating Revenues and Expenses$=$income before income tax$)$

Provision for Income $($Income Before Income Tax$-$Provision for Income Tax$=$Income from continuing operations$)$

Nonrecurring items $($Income from continuing operations $+-$ nonrecurring items$=$net income$)$

Separating out operating and nonoperating activities is helpful for users.$$ Many analysts will put more value on a company$$s income from operations compared to income from nonoperating activities.

A multi$-$step income statement helps users better understand the financials of the company as users get a more clear and thorough view of the company$$s income. A multi$-$step income statement is more transparent.

A multi$-$step income statement helps user understand the performance of the core business by separating out nonoperating activities.

A multi$-$step income statement allows users to better understand the financials of the company and thus make adjustments.