How to Prepare an Income Statement

What is the purpose of an income statement

This tells us the company’s profit before its interest and tax liabilities are accounted for. Moreover, an income statement has two main sections – the operating and non-operating sections. The operating section deals with the day-to-day business activities of the company. In contrast, the non-operating section records all the revenues and expenses unrelated to the company’s regular business activities.

Also known as profit and loss (P&L) statements, income statements summarize all income and expenses over a given period, including the cumulative impact of revenue, gain, expense, and loss transactions. Income statements are often shared as quarterly and annual reports, showing financial trends and comparisons over time. This number is essentially the pre-tax income your business generated during the reporting period. This can also be referred to as earnings before interest and taxes (EBIT). The income statement focuses on the revenue, expenses, gains, and losses reported by a company during a particular period.

How do you analyze an income statement?

Vertical analysis refers to the method of financial analysis where each line item is listed as a percentage of a base figure within the statement. This means line items on income statements are stated in percentages of gross sales, instead of in exact amounts of money, such as dollars. When it comes to financial statements, each communicates specific information and is needed in different contexts to understand a company’s financial health. Hence, potential investors, shareholders, creditors, etc. do not have access to information about the financial performance of the company.

What is the purpose of an income statement

Thirdly, some creditors would be interested in whether the company generates enough income to repay its debts. Finally, we arrive at the net income (or net loss), which is then divided by the weighted average shares outstanding to determine the Earnings Per Share (EPS). Gross Profit Gross profit is calculated by subtracting Cost of Goods Sold (or Cost of Sales) from Sales Revenue. No, all of our programs are 100 percent online, and available to participants regardless of their location.

How to Prepare an Income Statement

An income statement is a financial report detailing a company’s income and expenses over a reporting period. It can also be referred to as a profit and loss (P&L) statement and is typically prepared quarterly or annually. The income statement is one of the most important financial statements because it details a company’s income and expenses over a specific period. This document communicates a wealth of information to those reading it—from key executives and stakeholders to investors and employees. Being able to read an income statement is important, but knowing how to generate one is just as critical.

Or, the individual could recognize a customer advance as revenue, even though the related product has not yet been produced or shipped. Thus, fraudulent intent can interfere with the purpose of the income statement. Operating income or operating profit is the amount that a company makes after a subtracting cost of goods sold (COGS), as one does with gross income, but then also subtracting other operating costs such as utilities and wages. To obtain a company’s operating margin, one can divide the operating income by net sales to get a percentage.

Purpose of Income Statement

If you do not receive this email, please check your junk email folders and double-check your account to make sure the application was successfully submitted. We expect to offer our courses in additional languages in the future but, at this time, HBS Online can only be provided in English. Our platform features short, highly produced videos of HBS faculty and guest business experts, interactive graphs and exercises, cold calls to keep you engaged, and opportunities to contribute to a vibrant online community. We offer self-paced programs (with weekly deadlines) on the HBS Online course platform. Harvard Business School Online’s Business Insights Blog provides the career insights you need to achieve your goals and gain confidence in your business skills.

  • After discounting for any nonrecurring events, it’s possible to arrive at the value of net income applicable to common shares.
  • An income statement can also potentially be used to predict future performance since it helps calculate a company’s profit margin and earnings per share.
  • An income statement is an important indicator not only for a company but also for its financial health.
  • This allows people to analyze a company’s operating performance, profitability and growth over time, allowing people to make more informed decisions.

Competitors also may use them to gain insights about the success parameters of a company and focus areas such as lifting R&D spending. Operating income is what is left over after operating expenses are subtracted from gross profit. For example, if a company manufactures industrial machines, its revenue would include earnings from that activity. It wouldn’t include money earned from selling a building or financial investments. It shows you how much money flowed into and out of your business over a certain period of time. A single-step income statement, on the other hand, is a little more straightforward.

Non-Operating Revenue

They’re a little more complicated but can be useful to get a better picture of how core business activities are driving profits. An income statement will include all sales revenues plus any other income from asset sales, law suits, royalties, or other sources. Further, we can also calculate operating profit, which is operating expenses subtracted from the gross profit figure.

Trending Analysis

It received $25,800 from the sale of sports goods and $5,000 from training services. It spent various amounts listed for the given activities that total of $10,650. It realized net gains of $2,000 from the sale of an old van, and it incurred losses worth $800 for settling a dispute raised by a consumer. The above example is the simplest form of income statement that any standard business can generate.

Company B Income Statement

Most businesses have some expenses related to selling goods and/or services. Marketing, advertising, and promotion expenses are often grouped together as they are similar expenses, all related to selling. Over 1.8 million professionals use CFI to learn accounting, financial analysis, modeling and more. Start with a free account to explore 20+ always-free courses and hundreds of finance templates and cheat sheets. COGS only involves direct expenses like raw materials, labor and shipping costs.