What is income statement? Income statement is considered as “the” financial statement of an organization which indicates revenue and expenses for a given period of time. Income statement is also known as profit loss statement or P&L, earning statement, operation statement or statement of operations. There are two basic formats of income statement used in financial reporting; multi step and single step.
In multistep income statement four measures of incomes are reveled to judge the effectiveness of companies operations. Gross profit, operating profit, pretax and after tax provide interested parties a great overview of the company’s performance at various level. Please refer to ratio section within this site for elaborated explanation of the ratios that can be calculated from income statement.
In single step income statement, gross and operation profits are not stated. It only states the pretax and net income. This type of income statement is geared toward the audience where revealing a company’s performance at various level is not necessary. An income statement has several components. At each components we can do several types of calculations to understand how a company is performing for a given year.
Components of Income Statement:
An income statement has various components. In order to build a proper income statement, we need to understand the components below.
Total Revenue/Net Sales:
What is total revenue/net sales? Total revenue or net sales is a very important component of income statement. It is the gross income or the total revenue or cash inflow that a company receives by selling its product or services to its customer. Net sale or total revenue is usually calculated by subtracting return, allowances, and sales discount from sales.
Cost of goods Sold (COGS) / Cost of Sales:
What is cost of goods sold? COGS represent the direct cost associated to generate revenue. For manufacturer cost of goods sold is material cost, direct labor cost, carrying cost and overhead used to manufacture the product. For a service company cost of goods sold is generally the cost of service.
Gross profit is also known as gross margin or gross income. Gross income is the difference between Total Revenue/Net sales and Cost of Goods Sold. Gross profit indicates how the company is doing in terms of utilizing their raw materials to generate revenue. Use the gross profit margin calculator within the site to calculate gross profit margin.
Operating expenses are also known as Selling, General, and Administrative expenses (SG&A or SGA). This section of income statement is consists of any expenses that are needed to run a company. For example, employee salary, research and development expenses, advertisement expenses, depreciation of PPE, relating to an organization to produce revenue, such as administrative expenses and research & development expenses are considered few of the Operating expenses. Generally, managers have a great deal of control over this expense. Thus, operating expenses as a percentage of sales can reveal manager’s effectiveness in running a company as sales increases or decreases.
Operating profit is also known as operating income or earnings before interest and taxes (EBIT). Operating profit is calculated by subtracting operating expenses from gross profit. Operating income measures an organization’s profitability before interest and income taxes.
Interest expenses are cost of borrowing the funds to run a business. Usually companies net their interest expense here for the whole period.
Profit before Taxes:
Profit before taxes are calculated by subtracting the interest expense from operation profit. This is also known as pretax income or earnings before taxes (EBIT). This is a very crucial number to analysts. There are many ways a company can garnish their income taxes. Thus to get an appropriate reading of income before taxes, financial analysts uses EBIT for indications.
Income is the portion of tax a company has to pay on earning. Usually income tax is filled long after the income statement is made available. Thus, here the income tax is an approximation value.
This is generally the bottom line on an income statement and most commonly used indicator of a company’s profitability or loss. Along with countless number for calculation that can be done, net income is used to calculate earnings per share. A net income becomes retained earnings after dividends are provided to shareholders.
Irregular/non-recurring items are any profit or losses out of ordinary business practice. These items include discounted operations, loss due to natural disasters. This is calculated after tax to better predict the future revenue and cash flow. r
Below is an example multi-step income statement. Use the Income Statement Template above to create an income statement. You can simply print and turn it in as homework.
Income Statement Example:
Gross profit margin – Use the gross profit margin calculator to calculate gross profit margin
Earnings per share - Earnings per share calculation made simple
Back to Top