Income Statement: How to Read and Use It

When used in conjunction with the other financial statements, an income statement can give you a clear view of your cash flow. Small businesses typically start producing income statements when a bank or investor wants to review the financial performance of their business to see how profitable they are. Operating income is the result of subtracting the company’s operating expenses from its operating revenues. Following operating expenses are other forms of income, known as income from continuing operations. This includes operating income, other net income, interest-linked expenses, and applicable taxes. Added these together with operating income arrives at a net income of $88.1 billion for Microsoft.

Fiscal Year Explained: How To Choose One For Your Business

• Finally, the income tax line item reports your estimated income tax for the year.
• Tax rates may vary depending on the company’s jurisdiction, size, and other factors.
• The income statement is one of the three important financial statements used for reporting a company’s financial performance over a set accounting period.
• A P&L, which stands for profit and loss, indicates how the revenues are transformed into net profit.
• This profit will be forwarded to the Others comprehensive statement, which reported and presented non-operating income and expenses during the period.

Lenders and investors look at your profit margins to see how profitable your company is, and decide whether to give you money. Single-step income statements can be used to get a simple view of your business’s net income. These take minimal time to prepare and don’t differentiate operating versus non-operating accounts found on an income statement costs. The income statement should be used in tandem with the balance sheet and cash flow statement. With insights from all three of these financial reports, you can make informed decisions about how best to grow your business. If the net amount is a negative amount, it is referred to as a net loss.

How to read an income statement

By understanding the income and expense components of the statement, an investor can appreciate what makes a company profitable. The above example is the simplest form of income statement that any standard business can generate. It is called the single-step income statement as it is based on a simple calculation that sums up revenue and gains and subtracts expenses and losses.

Company B Income Statement

For example, sales revenues, cost of goods sold, gross profits, administration expenses, salary expenses, interest expenses, tax expenses, and net profits. Revenues are the incomes that the company generates from the sale of goods or services or other activities related to the main operation of the company’s business. For a trading company like ABC Co. above, the revenues are the total sales that it makes during the accounting period.

• Gross profit margin is the first key element to assess a company’s profitability.
• Total revenue is a crucial figure for any business to consider, as it represents the total amount of money generated from the sale of goods or services.
• While elements from the balance sheet and CFS are found on the income statement, and vice versa, each statement is independent and should be considered as such.
• The elements of an income statement include revenues, gains, gross profit, expenses, losses, and net income or loss.
• If the trend goes in a different direction, either costs or revenues are not correctly recorded or reported.

Businesses typically choose to report their P&L on an annual, quarterly, or monthly basis. Publicly traded companies are required to prepare financial statements on a quarterly and yearly basis, but small businesses aren’t as heavily regulated in their reporting. A company’s income statement will give the most basic assessment of how its business is doing. You can also see trends in the company’s costs, in its share count, and you can get a hint of its financial position in the interest expenses. Apple’s income statement that we’ve just analyzed is a multi-step income statement.

What financial insights can be gleaned from comparing consecutive income statements?

As we saw, while a single-step income statement is straightforward and easy to understand, a multi-step could pose significant challenges, especially if you’re just starting out in accounting. By taking our course Fundamentals of Financial Reporting you’ll be ready to tackle these and https://www.bookstime.com/blog/accounting-for-marketing-agencies most other accounting scenarios you’re likely to encounter in your practice. Subtract the cost of interest payments and income tax from your operating income, and you get the bottom line. This is how much money your company brought in for the period of time your income report covers.

Calculate Gross Profit

• Here’s the income statement for the first quarter of this year for a new local football association.
• The balance sheet tells you where you are, while the income statement tells you how you got there.
• For the service companies, such as accounting and law firms, the income statement usually does not have the cost of goods sold on it.
• A single-step income statement, on the other hand, is a little more straightforward.