What is income statement?
What is income statement?
An income statement is a financial statement that lists the revenue and expenses of the company. Additionally, it displays a company’s profit or loss over a specific time frame. You may better comprehend your company’s financial situation by comparing the income statement to the balance sheet, cash flow statement, and cash flow forecast.
A profit and loss statement, statement of operations, statement of financial result or income, or earnings statement are other names for the income statement.
What is the importance of income statement?
- Regular reports: The income statement is produced either weekly or monthly, whilst other financial statements are issued annually. As a result, investors and business owners may keep a close eye on the company’s performance and make wise choices. This enables them to identify and address small business issues before they grow and become costly.
- Identifying expenses: This statement identifies any upcoming costs, any unforeseen costs incurred by the business, and any areas that are above or under budget. Rent for the facility, employees, and other administrative charges are expenses. A small business may see that its expenses are rising as it starts to expand. These costs might include recruiting staff, purchasing supplies, and advertising the company.
- Overall analysis: An overview of the company is provided here to provide investors a better understanding of the venture they want to support. This document can be examined by banks and other financial organisations to determine whether the company is creditworthy.
An income statement is used by who?
Users of this financial statement fall into two categories: internal users and external users.
- Internal users: Firm management and the board of directors are examples of internal users who use this data to assess the state of the company and make decisions that will increase profits. Any worries about cash flow might also be addressed by them.
- External users: Investors, creditors, and rival businesses are examples of external users. To choose whether to invest in a company, investors look at how well-positioned it is for future growth and profitability. The income statement is used by creditors to determine if the business has sufficient cash flow to service its debts or get additional credit. Competitors use them to learn more about a company’s performance metrics and discover areas where it invests more money, like in research and development.
What are the main elements of an income statement?
- Sales or revenue: You may get a summary of the company’s total sales in this area of the income statement, which is the first one. There are two categories of revenue: operational and non-operating. Operating revenue is the money that a business makes from its core operations, such as producing goods or offering services. By carrying out non-core company tasks like system installation, operation, or maintenance, non-operating revenue is generated.
- Cost of goods sold (COGS): Also known as the expense incurred to produce goods or services, this term refers to the overall cost of sales or services. Remember that it solely accounts for the costs of the goods you sell. Ordinarily, indirect costs like overhead are excluded from COGS.
- Gross profit: It is calculated by deducting the total cost of items sold from net sales for your company. The money you made from the sale of the items is known as net sales, and the money you spent on their production is known as COGS.
- Gains: A gain is the outcome of a favourable occurrence that raises the revenue of a company. Gains represent the money the company made from various commercial ventures, such as the sale of an operating sector. The same goes for the gains from one-time non-business activities, which are also counted as gains for the company. An organisation might be selling off old cars or underutilised land, for instance. Despite the fact that gain is regarded as a secondary form of revenue, the two concepts are distinct. The money that a business frequently receives is known as revenue, while the sale of fixed assets—a rare transaction for a business—can result in a profit.
- Expenses: These are the costs incurred by the business in order to produce income. The depreciation of equipment, staff salaries, and supplier payments are a few instances of regular expenses. Operating and non-operating expenses make up the two primary types of business expenses. Operating expenses are those that are incurred as a result of a company’s primary business operations; non-operating expenses are those that are not. Operating expenses include things like sales commission, pension payments, and salaries, whereas non-operating expenses include things like charges for old inventory or lawsuit settlements.
How to read the income statement?
Here is a new local football association’s income statement for the first quarter of this year.
Example: Single-Step Income Statement
Example: Multi-Step Income Statement
The association made $30,000 from selling products and an additional $5,000 by charging for training. The association spent money on a variety of activities, totaling $13,450 in expenses. They made $2,000 from the sale of an outdated van, but they lost $1,000 from the settlement of an ongoing consumer lawsuit. Let’s now insert the data in the following equation to determine the net income:
Net Income = (Revenue + Gains) – (Expenses + Losses)
= (35,000 + 2,000) – (13,450 + 1,000)
= $22,550
One of the most basic types of income statements is the one shown above, where the net income is calculated by adding the values of income, expense, gains, and losses to the equation. It is known as a single-step income statement since it is based on a straightforward computation.
In the actual world, businesses that conduct their operations on a global scale offer a variety of goods and services and engage in mergers and alliances. They have a long list of activities and expenses to mention as a result of these activities. Additionally, these businesses must adhere to particular reporting laws. Therefore, larger businesses choose multi-step income statements. Operational revenues, operating costs, and gains are distinguished in this approach from non-operating costs, non-operating revenues, and losses. The four levels of profitability are gross, operating, pre-tax, and post-tax. The single-step income statement’s company information is used in the example above.
