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What Is An Income Statement? Financial Reports For Small Businesses

what is the purpose of the income statement

This number tells you the amount of money the company spent to produce the goods or services it sold during the accounting period. The revenue section is typically the simplest part of the income statement. They examine a company’s historical performance, as reported on income statements, to determine its investment value and creditworthiness and to help predict its future success. While past results don’t guarantee future success, they are the most common way of gauging the economic value of a business and the likelihood of repayment of debt. By categorizing this data, the income statement can provide deeper insights into the company’s earnings.

For instance, the following income statement of a toy company shows us its performance during the year 2018. All publicly-traded companies are required to release an income statement either quarterly or yearly. There are three major items that complete the structure of an income statement – revenue, expenses, and net profit. It shows the company’s performance over a particular period of time. There are two sections in an income statement – the operating section and the non-operating section. The operating section deals with the day-to-day business activities of the company.

Expenses and Losses on the Income Statement

Corporate financial announcements frequently emphasize income statements more than the other financial statements. But if you’re looking for a super simple financial report to calculate your company’s financial performance, single-step is the way to go. In both income statements and balance sheets, line items are often grouped into natural categories to help make the statements easier to read and help stakeholders find specific items of interest. Balance sheets list current assets, long-term assets, total assets, current liabilities, long term liabilities, total liabilities and accumulated retained earnings (or shareholder’s equity). Income statements show revenue, gains, expenses, losses and net income. Multiple-step income statements are organized into separate sections for operating and non-operating activities. The operating activities section lists revenues and expenses that are directly related to core business activities.

Common-size analysis of the income statement involves stating each line item on the income statement as a percentage of sales. Common-size statements facilitate comparison across time periods and across companies of different sizes. Non-operating items are reported separately from operating items on the income statement.

Management Accounting

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. Your choice of format depends on what you intend to use your income statement for, and what level of financial detail you’re intending to provide. A cash flow statement sets out a business’s cash flows from its operating activities, its financing activities, and its investment activities. In this example of income statement, the business has a net loss for this time period.

  • It does not show the flows into and out of the accounts during the period.
  • The audience for this document includes both internal and external financial statement users who rely on the income statement for important decision-making.
  • When reviewing, make sure that all account balances align with either the expense or revenue normal balance for the specific account.
  • At the top of the income statement is the total amount of money brought in from sales of products or services.
  • The single-step format lists all the revenues and ordinary gains and then deducts all the expenses and ordinary losses involved in calculating ordinary incomes.

Indirect Cost Recovery – Money received by the university as reimbursement related to the costs of implementing the project or contract. The indirect rate (% of direct costs incurred related to this project) is stipulated by the granting organization. Brainyard delivers data-driven insights and income statement example expert advice to help businesses discover, interpret and act on emerging opportunities and trends. As a business owner, you have many options for paying yourself, but each comes with tax implications. Remember to subtract returns and sales discounts from the total amount you earn from sales.

What is the purpose of an income statement, and who is the audience for this document?

It’s a snapshot of your whole business as it stands at a specific point in time. Net profit, also called “net sales” or “net earnings,” is the total profit for your business.

Some income statements show interest income and interest expense separately. The interest income and expense are then added or subtracted from the operating profits to arrive at operating profit before income tax. Moving down the stairs from the net revenue line, there are several lines that represent various kinds of operating expenses. Although these lines can be reported in various orders, the next line after net revenues typically shows the costs of the sales.


The income statement, along with balance sheet and cash flow statement, helps you understand the financial health of your business. It received $25,800 from the sale of sports goods and $5,000 from training services. It spent various amounts as listed for the given activities that total $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 the income statement that any standard business can generate.

what is the purpose of the income statement

The main purpose of this financial report is to measure the financial performance of the entity by comparing the revenue earned and the expenses incurred during the period. The net of the revenue and expenses is considered the net income and shows the overall financial health of the entity for a period of time (i.e. fiscal year, quarter, month).

Interest Coverage RatioThe interest coverage ratio indicates how many times a company’s current earnings before interest and taxes can be used to pay interest on its outstanding debt. It can be used to determine a company’s liquidity position by evaluating how easily it can pay interest on its outstanding debt. Every quarter banks or financial institutions demand the income statement be submitted for review and the utilization proceeds of it.

  • Income Taxes refer to the relevant taxes charged on pre-tax income.
  • On a high-level statement such as this, line items and figures represent groups of accounts, primarily.
  • Download our FREE whitepaper on financial statements to dive into P&L statements, balance sheets, and cash flow statements.
  • That way, you get a better picture of how the company’s core business activities are driving profits.
  • These three statements are informative tools that traders can use to analyze acompany’s financial strengthand provide a quick picture of a company’s financial health and underlying value.
  • Benefit expense is automatically calculated when processing payroll – see Payments section for further detail on benefit pool rates.

The amount of income available to common shareholders is the amount of net income remaining after preferred dividends have been paid. Revenue is recognized in the period it is earned, which may or may not be in the same period as the related cash collection. Recognition of revenue when earned is a fundamental principal of accrual accounting. Describe other comprehensive income and identify major types of items included in it. Please download CFI’s free income statement template to produce a year-over-year income statement with your own data.

Detailed Example Statement

As a senior management consultant and owner, he used his technical expertise to conduct an analysis of a company’s operational, financial and business management issues. James has been writing business and finance related topics for work.chron,, and e-commerce websites since 2007. He graduated from Georgia Tech with a Bachelor of Mechanical Engineering and received an MBA from Columbia University. It is found by dividing total short- and long-term debt by the total amount of equity capital. A ratio of $1 in debt to $1 in equity is generally considered a comfortable amount of leverage. Higher amounts of financial leverage put the company at more risk during economic downturns.

What is the purpose of the income statement quizlet?

The purpose of the income statement is to show a company's profitability during a specific period of time. The difference (or "net") between the revenues and expenses for the company is often referred to as the bottom line and it is labeled as either Net Income of Net Loss. Also known as the Profit & Loss Statement.

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