When preparing income statements, there are two main formats a company can choose to use: single-step or multiple-step. Single-step is the easier of the two to prepare, but it doesn't provide some of the valuable details that are included in the multiple-step variety. Here's a thorough explanation of both types, as well as an example of each.

Single-step income statements
As the name implies, a single-step income statement uses a single calculation to determine a company's net income. It simply adds up all of the revenue a company brings in from its business activities, as well as any other gains, such as from investments or interest income. Then, any expenses and losses are added up and are subtracted from the revenue/gains, to calculate the net income.

Wiki Net Income

A single-step income statement may break down the sources of revenue and expenses, as the following example shows, but it doesn't go into too much detail. Also, notice how the statement is clearly split into two areas -- revenue and gains on the top, and expenses and losses on the bottom. This makes the single-step net income calculation easier.

Single Step Income

Multiple-step income statements
On the other hand, a multiple-step income statement offers a more in-depth look at a company's performance. Not only does a multiple-step income statement contain an itemized list of revenue and expenses, it also breaks down the numbers into operating revenue and expenses that result from the company's primary business activities, and non-operating items, which aren't directly related to the company's business.

In addition to calculating net income, a multiple-step income statement uses intermediate steps (hence the name) to calculate the company's gross profit and operating income, two metrics which can be especially useful for prospective investors to compare the performance of similar companies.

The first calculation on a multiple-step income statement subtracts the cost of goods sold (COGS) from the net sales, which produces the gross profit.

Wiki Gross Profit

The second calculation subtracts the company's operating expenses, such as office supplies and advertising costs, to arrive at the operating income. This can be useful, as it only takes into account the items that have to do with the company's business activities, and excludes certain one-time costs and the performance of any investments the company holds.

Wiki Operating Income

Finally, by adding or subtracting the total of the company's non-operating items, we can arrive at the net income, which represents the actual amount of money a company made during the time period.

Wiki Net Income Multi

Here's a basic example of a multiple-step income statement. Notice where the three calculations mentioned take place from top to bottom.

Multi Step Income

What do most companies do?
Simpler companies that are only concerned with their net income can use the single step method when preparing their income statements. However, because of the useful metrics they contain, most businesses – especially those with investors – choose to use multiple-step income statements.

The $15,978 Social Security bonus most retirees completely overlook
If you're like most Americans, you're a few years (or more) behind on your retirement savings. But a handful of little-known "Social Security secrets" could help ensure a boost in your retirement income. In fact, one MarketWatch reporter argues that if more Americans knew about this, the government would have to shell out an extra $10 billion annually. For example: one easy, 17-minute trick could pay you as much as $15,978 more... each year! Once you learn how to take advantage of all these loopholes, we think you could retire confidently with the peace of mind we're all after. Simply click here to discover how you can take advantage of these strategies.

This article is part of The Motley Fool's Knowledge Center, which was created based on the collected wisdom of a fantastic community of investors based in the Foolsaurus. Pop on over there to learn more about our Wiki and how you can be involved in helping the world invest, better! If you see any issues with this page, please email us at knowledgecenter@fool.com. Thanks -- and Fool on!

Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.