The income statement is a crucial financial statement for any company. Basically, it shows how much money a business has made or lost over a certain time frame. The financial statements, such as the balance sheet and income statement, can provide vital insight into the company’s success and viability. The income statement example, formula, and formats will be discussed in this piece.
Overview
The income statement is one of the three financial statements utilized in accounting and corporate finance, which includes financial modeling. The revenue, costs, gross profit, selling and administration expenses, other expenses and income, taxes paid, and net profit are all broken down clearly and logically in the statement.
Each section of the statement covers a distinct time period that makes sense for the way the company functions. The most common period split for internal reporting is monthly, while a thirteen-period cycle is also common. From these regular reports, for example, sums are derived for use in determining quarterly and annual results of the income statement.
What Is an Income Statement?
An income statement is a crucial piece of financial information for any company. It displays the income, expenses, and profitability of your organization over a given time frame.
It is a crucial tool for organizing your strategy and operating your company. Lenders, investors, and other partners evaluate your financial performance and make decisions that may have an impact on the future of your business.
What Is the Income Statement Formula?
Revenues-expenses=net income, which is the essential calculation for an income statement. To determine if the business is profitable, just plug in the numbers. A company is profitable if it generates more money in revenue than it spends.
Income Statement Elements
Due to the fact that costs and earnings depend on the kind of operations a company has engaged in, the income statement formats and formulas may vary between different businesses. However, any revenue statement will have a few fundamental line items.
An income statement typically includes the following elements:
#1. Revenue/Sales
The statement’s top heading, Sales/Revenue, refers to the company’s revenue from sales or services. This sum represents the whole cost of manufacturing the goods or providing the services that are being offered. Some organizations have numerous revenue streams that supplement their main revenue stream.
#2. Cost for Goods Sold (Cogs)
COGS combines the direct costs of buying and selling items to create money. In a service-based business, this line item may be called “Cost of Sales.” Direct costs include labor, supplies, and depreciation.
#3. Gross Revenue
Income Gross profit is found by subtracting COGS from Sales Revenue.
#4. Marketing, Promotion, and Advertising Costs
Many businesses have expenses they must pay when they make a profit from the sale of goods or services. Expenditures for marketing, advertising, and promotion are typically rolled into one total due to their similarity and close relationship to sales.
#5. G&a (General and Administrative) Costs
Selling, general, and administrative costs include any other non-product-specific costs directly associated with running the business. Operating expenses include things like paying staff, paying for office space, paying for insurance, paying for travel, and sometimes even paying for depreciation and amortization. However, depreciation and amortization might be combined into one part, but some businesses choose to keep them separate.
See the definition and how to calculate Amortization
#6. Net Profit
To calculate net income, pre-tax income is removed from it. This amount appears in retained earnings on the balance sheet after any dividend payments have been deducted.
How Do I Prepare an Income Statement?
The income statement provides crucial data for determining the financial health of your company. Putting together an income statement for your company is as easy as following these instructions.
#1. Print the Trial Balance
Create a period-end trial balance in your accounting program. A summary of the final amounts in each general ledger account can be seen in the trial balance.
#2. Determine Your Total Revenue or Sales
A single or many revenue or sales accounts may be included in your trial balance. When filling out your income statement’s revenue line item, add up all the revenue line items on the trial balance.
#3. Find Out What Your Cost of Goods Sold Is
The cost of goods sold includes the direct cost of manufacturing your company’s goods or services. Labor, materials, freight, storage, packing, and factory overhead are included.
Add all the cost of goods sold line items on your trial balance and put the total under revenue on your income statement.
#4. Calculate Your Gross Profit
Gross profit is the remaining money after deducting COGS but prior to deducting operating costs. Enter the amount after deducting your COGS from the revenue total as your gross profit.
#5. Calculate Your Operating Costs
Operating expenses include labor, rent, office supplies, and more. Single-step income statements may combine operating expenses and the cost of goods sold. Most organizations utilize a multi-step income statement format style that breaks up operating expenses into many line categories. Some running expenses may be grouped for ease. “Utilities” can include your electric, gas, and sewer bills. This prevents a cumbersome income statement.
Enter each operating expense grouping under the Operating Expenses subhead, with total expenses underneath.
#6. Calculate Your Net Income or Loss
On the very last line of your I.S., write the amount remaining after deducting all of your operational expenses from your gross profit. Assuming the sum is positive, you have a net income. If the final tally is negative, you’ve experienced a net loss.
Why Is the Income Statement Important?
The I.S is important since it details the period’s earnings for the business. It also reveals the cost of bringing in that revenue. Gross profit, operating expenses, and net earnings are all components of the statement.
The Balance Sheet and Income Statement
Both the income statement and the balance sheet provide essential information about the financial well-being and performance of a business. Comparatively, an income statement analyzes a business’s profit or loss over a specific time frame, whereas a balance sheet shows the company’s financial position at a single point in time.
The financial health and future prospects of a business can be seen in full by comparing the income statement and balance sheet. Both are necessary for business leaders, investors, and banks.
Even if you don’t come from a financial or accounting background, being able to read and understand financial statements is an important skill for business owners and executives to have.
What Is a Balance Sheet?
A company’s balance sheet shows its financial status at a given period. Owner’s equity includes initial investment and retained earnings attributed to owners or shareholders. It covers a company’s assets, liabilities, and obligations. This statement has two columns based on the equation:
Assets = Liabilities + ShareholderEquity
This equation forms a balance sheet with assets, liabilities, and owner equity. The balance sheet details transactions, funds raised, total debts incurred, assets purchased, and current valuations to show the company’s success since its establishment.
Using financial ratios like debt-to-equity, which represents a company’s ability to pay its debts with equity, or the current ratio, which divides current assets by current liabilities, gives insight into a company’s operations, finances, and future prospects.
What Distinguishes a Balance Sheet From an Income Statement?
Here is a summary of the differences between the income statement and the balance sheet.
| Balance sheet | Income statement | |
| Time | The balance sheet provides a concise overview of a company’s financial situation during a particular period. | A summary of the company’s financial performance for a certain time period is offered by the income statement. |
| Key items | In order to provide the right data, it is broken down even further into asset categories, liability buckets, and equity for the shareholders. | It consists of receipts, outlays, and profits and losses from the sale or disposal of assets. |
| Financial analysis | It aids in assessing fiscal health by employing metrics including the current ratio, debt-to-equity ratio, and return on shareholder equity. | Gross margins, operational margins, price-to-earnings, and interest coverage are all ratios that can be used to illustrate a company’s financial health. |
| Usage | It is used by lenders and investors to assess collateral availability and creditworthiness. | It is used by management, shareholders, investors, and others to evaluate a company’s performance and prospects going forward. |
What Features of an Income Statement and a Balance Sheet Are Similar?
The balance sheet and the income statement are similar in that they provide a complete picture of a company’s financial health and prospects when read together.
Together with the cash flow statement, they form the backbone of any financial report. Errors or omissions in any of them can lead to inaccurate results. A balance sheet is prepared in the same accounting cycle as an income statement, and it follows the income statement directly.
The balance sheet entry for a company’s shareholders’ equity will increase by $10,000 if it earns $10,000 over a given period but pays out no dividends or draws from those profits. Because of these and other similarities, they are interdependent and essential to provide a full and accurate view of the financials.
Formats of Income Statement
There are two primary formats in which the income statement can be presented in financial reports: the multi-step and the single-step income statement formats. Two illustrations are provided below.
| Multi-Step Format | Single-Step Format |
| Net Sales | Net Sales |
| Cost of Sales | Materials and Production |
| Gross Income* | Marketing and Administrative |
| Selling, General, and Administrative Expenses (SG&A) | Research and development expenses (R&D) |
| Operating Income* | Other Income & Expenses |
| Other Income & Expenses | Pretax Income |
| Pretax Income* | Taxes |
| Taxes | Net Income |
| Net Income (after tax)* | — |
Accounts on an Income Statement (Multi-Step Formats of Income Statement)
- Net sales are a company’s sales to consumers (also known as sales or revenue): Investors focus on a company’s bottom line (net income), although revenue begins with the top line. A company’s existing product line profit margins eventually approach a ceiling that’s hard to surpass. So, firms can only grow as fast as their sales.
- The cost of sales comprises labor, raw materials, and manufacturing overhead: Even if itemized, depreciation costs belong in the cost of sales. Wholesalers and retailers resell their purchases. For service companies, sales costs equal revenue costs.
- Gross income or margin: revenue Gross profit is more than net sales minus the cost of sales. Gross profit pays for all other business expenses. The higher and more stable a company’s gross margin, the better its net income.
- SG&A is the business’s operating costs: Financial experts say management heavily influences this spending. We evaluate SG&A spending as a percentage of sales to gauge management effectiveness.
- Profitability Gross profit minus SG&A equals operating income: This is a company’s ordinary earnings before interest, taxes, and special items. Financial experts prefer operational income over net income as a measure of profitability.
- Net income or profit: This is the bottom line, a key profitability metric. If spending exceeds revenue, this account will show a net loss. After preferred dividends, net income is added to a company’s retained earnings. Net income estimated using outstanding shares, stock options, warrants, and other securities is also included (diluted).
- Comprehensive income statement formats and formula comprises currency translation adjustments, minimum pension responsibility adjustments, and unrealized gains or losses on debt and equity assets. The investing industry is concerned about net income. All of the adjustment items are uncontrollable economic events. It takes time for them to become balanced, despite their large influence.
Income Statement Example
An example income statement for firm XYZ for the fiscal years ending 2019 and 2020 is shown below (expenses are in parentheses):
| (Figures USD) | 2020 | 2021 |
| Net Sales | 1,500,000 | 2,000,000 |
| Cost of Sales | (350,000) | (375,000) |
| Gross Income | 1,150,000 | 1,625,000 |
| Operating Expenses (SG&A) | (235,000) | (260,000) |
| Operating Income | 915,000 | 1,365,000 |
| Other Income (Expense) | 40,000 | 60,000 |
| Extraordinary Gain (Loss) | – | (15,000) |
| Interest Expense | (50,000) | (50,000) |
| Net Profit Before Taxes (Pretax Income) | 905,000 | 1,360,000 |
| Taxes | (300,000) | (475,000) |
| Net Income | 605,000 | 885,000 |
From this income statement example, we can infer that between 2020 and 2021, sales at company XYZ increased by roughly 33%, while expenses as a percentage of sales dropped from 23% to 19%. As a result, the company’s gross income grew substantially in 2021, which is excellent news for its bottom line.
In addition to the example of the income statement above, the increase in general running expenses has been maintained to a minimum, at $25,000. The company expects operating expenses to account for 15.7% of sales in 2020, but only 13% in 2021. This bodes really well in light of the dramatic rise in sales.
This led to a rise in the firm’s bottom line, or net income, from $600,000 in 2020 to $885,000 the following year. The company’s profit margins (net income/net sales) have increased from 40% to 44% on the back of the improved year-over-year trends in both income and expenses.
How Do You Analyze an Income Statement?
The Following are some steps to take if you’ve been tasked with analyzing an income statement but don’t know where to begin:
- Verify your calculations
- Identify the bottom line
- Look at the sources of income
- Examine the various types of spending
- Now take a look at the amounts
- Check the progress from one year to the next.
- Examine the numbers in your head for any logical connections
Income Statement Formula
One of the most important financial statements for a corporation is the income statement, which displays expenses, revenue, profit, and loss over time and has a formula that governs it. Once all of the company’s expenses have been deducted from the period’s revenue or sales, the profit or loss is established. It is also referred to as a profit and loss statement, earnings statement, or income statement. Typically, formulas drawn from the income statement is employed.
Formulas:
Gross Profit = Revenue – Cost of Goods Sales (COGS)
Operating profit = Earnings before Interest & Tax (EBIT) = Sales – COGS – Operating expenses
Net Profit = Revenue – All expenses
Every company has to make money. They must sell the goods or services they are offering in order to cover costs such as expenses, loan interest payments, taxes, etc. Net income is the amount that remains after all necessary expenses have been covered. The amount that stockholders have access to is this.
What Is the Summary of Income Statement?
One of the most important financial statements that a company maintains is called the Income Statement, and it details the company’s gains and losses over a specified time period. The profit or loss is calculated by first determining all of the operating and non-operating expenses, then deducting those expenses from all of the operating income.
What Is the Difference Between Operating Revenue and Non-Operating Revenue?
The core activity of a company, such as selling its wares, is the source of the operating revenue that it generates. A company can generate non-operating revenue from a variety of supplementary sources, such as interest income earned on banked money or income earned through the leasing of commercial property.
What Insights Should You Look for in an Income Statement?
An investor can determine what factors contribute to a company’s profitability by looking at the income and expense components (or not). Competitors can use them to see how their own company stacks up against others based on a variety of metrics. Research analysts make use of them to compare performance from one year to the next and from one quarter to the next.
What Are the Goals of Preparing an Income Statement?
An income statement is a type of financial statement that details a company’s revenues and expenses for a specific time period. Additionally, it reveals whether or not a corporation is producing a profit for the period under consideration. Along with the balance sheet and the statement of cash flow, the income statement is one of the financial statements that can help you understand how your company is doing financially.
What Is the Most Important Income Statement?
Because it illustrates a company’s potential for making a profit, the income statement is likely to be considered by the vast majority of users to be the single most essential component of an organization’s financial statements. In addition, the majority of the information that is presented on the income statement is expressed in dollars that are generally up to date, which indicates that it is accurate to a decent degree.
Who Needs Income Statement?
When applying for business financing or trying to pique the interest of potential investors, you will need to provide a statement of your company’s income. The income statement not only illustrates the company’s historical profitability, but also serves as a tool for forecasting the company’s future profitability, which provides an indication of its capacity to repay loans.
Who Is Responsible for Preparing the Income Statement?
The management of a company is the entity that is tasked with the obligation of preparing the company’s financial statements and any disclosures that are relevant to those statements. An examination of the company’s financial statements and disclosures is then performed by an independent auditor from outside the company.
Conclusion
A company’s income statement contains a wealth of information regarding the driving forces behind its financial success. Due to its regular generation, it provides you with up-to-date information more quickly than any other statement. To calculate the net profit or loss for a given period, one needs only add up the numbers using the income statement example and formula, which details the company’s expenses, income, gains, and losses. Timely decision-making based on this data is essential to maintaining a healthy financial position for your firm.
Income Statement FAQs
What 4 things does an income statement show?
- Revenue
- Expenses
- Gains
- Losses
What is another name for income statement?
It is also sometimes called a profit-and-loss (P&L) statement or an earnings statement.
What is classified income statement?
A classified income statement is a financial report displaying revenues, expenses, and profits with subtotals.
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