The final output of the financial accounting system is a set of financial statements. Many users of financial statements today focus on the income statement, which summarizes the revenues and expenses for a period of time, and tells users whether the company has operated at a profit or a loss for the period.

Small, relatively simple companies frequently use a straightforward income statement summarizing all revenues, all expenses, and net income. But as a company becomes more complex, a more detailed income statement may help users of the financial statements better understand the results of the company's operations.

Financial statements are prepared to communicate financial information about a company to users of the financial statements. Communication can be enhanced by formatting the income statement to highlight different aspects of the company's operations.

Companies may choose to use a single-step income statement. In this statement format, all revenues and gains are presented in the first section of the statement, followed by all expenses and losses. The difference between total revenues and total expenses is net income. The company may show a subtotal for income before taxes, but there will be no other sections in the single-step income statement.

As a company's operations become more complex, it may choose to use a multiple-step income statement to highlight the result of operations; that is, the results from its main business activities, and the results of miscellaneous activities. In a multiple-step income statement, the company displays a subtotal for Income from Operations, the difference between revenues from its main business activities and the expense of carrying out these principal activities. It will also have a section of Other Revenues, Gains, Expenses, and Losses. This section presents information on miscellaneous revenues and gains such as interest revenue, rent revenue from renting temporarily idle space, and gains on the sale of old equipment. It will also have miscellaneous expense and loss items, such as interest expense and losses on the sale of old equipment. When the income statement has separate sections, it is easier for the user to see how the main business of the company is doing, and how it was affected by ancillary activities.

Finally, a multiple-step income statement may also have several sections and subtotals within the part of the statement highlighting the main business activities. The company may choose to highlight Gross Margin, the difference between sales and cost of goods sold. Gross margin is particularly important for retailing and manufacturing companies.

 
 
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