What is an income statement?
An income statement is a financial report that outlines an organization’s income and expenses. It also reveals the profit and loss of a company for a certain period. The income statement indicates a company’s net revenue over a given period. Total income includes both operational and non-operational revenues. On the other hand, total costs comprise both direct and indirect operations. The income statement is also known as the statement of earnings. In financial accounting, the income statement is an important report about finances. It helps the businesses assess their profit and loss over a given period. An income statement reveals vital information about a company’s performance, managerial efficiency, weak areas, and performance compared to its competitors.
What are the three main parts of the income statement?
Following are the three main parts of the income statement:
- Revenues
Revenue may be described as the sum of money earned by a firm from selling products and services to its consumers. It contains the majority of the company’s operations. For example, if a firm sells cars, its revenue will reflect the sum of money earned from the sale of the cars. Revenue does not include the costs of taxes or depreciation amount.
Revenue reveals the amount of money a company generates from selling its primary goods and services. Revenue is always placed at the top of the income statement report. Revenue is the sum of the price of the products and services sold by a company. Revenue does not include cash flow. A company reports revenue even for those products and services whose payment is still pending.
- Expenditures
Expenditures are sometimes known as “business expenses.” These are those expenses that a company incurs to generate revenue. Expenses are calculated after calculating the revenue. Expenditures pertain to the operating expenditures, sales costs and loss expenses.
- Operating Expenditures
Operating expenditures are costs besides the cost of products sold that a firm incurs in doing business. Operating expenses encompass wages, marketing, rentals, utility costs, cost of equipment and supplies, and adjusting for inflation. Operating expenditures are the cost components that may be divided into two categories: sales costs and operational expenditures.
- Sales Costs
Sales costs are the costs incurred implicitly or explicitly due to the sale of items. Sales costs encompass the sales executive’s salary, marketing expenses, incentives, storage costs, and delivery charges.
- Loss Expenses
The expenses incurred due to a failed sale, governmental fines, fines imposed by regulatory bodies, litigation costs and other unexpected charges are loss statements.
- Net Income
Net income is the equivalent of net sales or gross profit. It is the third major component of the income statement. The gross profit section indicates the total income of a company. The total income is the net income after the sales of goods and services. Net income pertains to a company’s revenue after selling the goods and services.
Companies calculate net income using the following formula:
Net Income: (Revenues + gains) – (Expenditures + Loses)
The net income reveals the most accurate picture of a company’s performance.
What is the format of the income statement?
According to accounting dissertation writing services UK, the income statement comprises the following two formats:
- One-Step Income statement
The one-step statement displays one type of revenue and one type of spending. It is only suitable for internal assessments of a company. It is not appropriate for external users because external users cannot compute numerous performance and income measures with such minimal data.
- Multi-Step format
Multi-step format for statements of income encompasses multiple stages in assessing a company’s financials. First, the expenditures are divided into different categories as per their relevance and usage. Multi-step format encompasses the division and categorization of the following components:
- Expenditures pertaining to sold goods and services
- Operational and Non-Operational Costs
After separating and categorizing the expenses and costs, a financial accountant computes the net profit, running income and aggregate profit of the company.
Both formats list the revenues before the expenses, and expenses are listed in chronological and alphabetical order. Both income statements have the following format:
- Organization’s name
- Statement’s Title
- Report’s Time Period
What information do you need for the income statement?
You need the following information for preparing the statement of income:
- Time Period
The first thing is to determine the time period for which you want to prepare the report. It is important because the information you will need depends on the time period. For example, you might choose to prepare a monthly report, a quarterly report or an annual report.
- Revenue
Once you specify the time period, you will have to calculate the total revenue your business generated during that time. It should include the revenue generated from every aspect of your business. You will need this information to prepare a statement of income.
- Cost of Sold Goods
You will also need information regarding the costs incurred on the sale of goods and services. It entails calculating the direct and indirect costs. For instance:
- Wages
- Procurement and Raw material expenses
- Additional components expenses
- Transportation Cost
- Any unexpected costs incurred during production
In addition to the costs mentioned above, you need the following information for preparing an income statement:
- Gross Profit
- Operating Income
- Income before taxes
- Net Income
- Earnings Per Share
- Depreciation
What are the different uses of income statements, and how it is helpful for companies?
The primary aim of an income statement is to communicate to stakeholders the facts about the company’s financial growth. It gives important details about the company’s efficiency to make a comparison with the competitors. Moreover, the statement of income reports informs the upper management about the performance of various departments and operations. These insights help in the decision making and strategy building process. Companies decide to expand or shut down operations based on the income statements. It is also useful in evaluating the strengths and weaknesses of a company. After identifying the weaknesses, the company invests more in weaker areas.
Conclusion
An income statement is a useful tool to assess a company’s financial growth and operational efficiency. The upper management can make informed decisions based on the statement of income reports. These reports help understand the upper management about the company’s net revenues, profits, and sales.
