Income statement
Companies have a great incentive to provide timely reliable financial information to help decision makers in rationalizing their decisions. To provide reasonable comparable financial information, companies should prepare four financial statements; one of them is income statement.
income statement is one of the three important financial statements used for reporting a company’s financial performance over a specific accounting period, with the other two key statements being the balance sheet and the statement of cash flows. The Income Statement is one of a company’s core financial statements that show their profit and loss over a period of time. The profit or loss is determined by taking all revenues and subtracting all expenses from both operating and non-operating activities.
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Income statement example
An income statement have many synonymous such as, profit and loss account (also referred to as a profit and loss statement (P&L), statement of profit or loss, revenue statement, statement of financial performance, earnings statement, statement of earnings, operating statement, or statement of operations)
and it is one of the financial statements of a company and shows the company’s revenues and expenses during a particular period. So, to prepare an income statement, company should calculate their revenues, and determine their costs and expenses. Especially, cost of goods sold.
Revenues are one of the most important components of income statement, especially sales revenues. These revenues can be arises from many different types of resources and are called various names depending on the nature of the business. For example, in service companies revenues are named according to its source such as (fees, commissions, interest, etc.), but in merchandising and manufacturing companies they are called sales because it is generated from selling products to customers. Common sources of revenue are sales, Professional Fees, services, Commissions, Interest, dividends, royalties, consulting services, and Rent.
Another important component is company expenses. Expenses are the costs necessary to generate revenues, and represent the cost of assets consumed or services used in the process of generating revenues.
Expenses have a negative effect on owner’s equity and result of company operations, if the amount of expenses spent during the accounting period exceed the amount of revenues generated , then company will suffer losses and owner`s equity will be decreased. Expenses should be matched with revenues it generates at the end of each accounting period.
Companies may incur expenses and spend a lot of money on many aspects such as salaries and wages, utilities (electric, gas, and water expense) delivery (gasoline, repairs, licenses, etc.) supplies (napkins, detergents, aprons, etc.), rent, interest expense, production ingredients, advertising, insurance, and property tax expense.
helps business owners decide whether they can generate profit by increasing revenues, by decreasing costs, or both. It also shows the effectiveness of the strategies that the business set at the beginning of a financial period. The business owners can refer to this document to see if the strategies have paid off. Based on their analysis, they can come up with the best solutions to yield more profit.
To prepare in a service sector, the first step is to subtract the cost of services from net service revenue, giving you the company’s gross profits. Then you add up your operating expenses, such as advertising, repairs and office supplies. Subtract the total from gross profits to get your operating income. For example, suppose that nawa company have revenues totaled 15000 and expenses 12000 at the end of the year, then company net income would be 3000 (total revenues 15000 – total expenses 12000).
However, in a retail companies, we can prepare income statement in two different formats: single step income statement and multiple step income statement. A single-step income statement offers a simplified snapshot of a company’s revenue and expenses. This straightforward document merely conveys a company’s revenue, expenses, and bottom-line net income. All revenues and gains are totaled at the top of the statement, while all expenses and losses are totaled at the bottom. But multiple step income statement categorize expenses as either direct costs (also known as non-operational costs), or indirect costs (also known as operational costs). Direct costs refer to expenses for a specific item, such as a product, service, or project. Contrarily, indirect costs are generalized expenses that go towards a company’s broader infrastructure, and therefore cannot be assigned to the cost of a specific object. Examples of indirect costs include salaries, marketing efforts, research and development, accounting expenses, legal fees, utilities, phone service, and rent
For example: sheta companies have the following data for year ended 2020: operating expenses 925000, cost of goods sold 1,289,000, interest expense 70,000 , interest revenues 28,000 , loss on the sale of equipment 10,000 , net sales 2,312,000 .
Sheta Company will prepare single step income statement and multiple step income statement as following:
(a) Income Statement
For the Year Ended December 31, 2010
Net sales $2,312,000
Cost of goods sold (1,289,000)
Gross profit 1,023,000
Operating expenses (925,000)
Income from operations . 98,000
Other revenues and gains
Interest revenue 28,000
Other expenses and losses
Interest expense (70,000)
Loss on sale of equipment (10,000) (52,000)
Net income $ 46,000
(b) Income Statement
For the Year Ended December 31, 2010
Revenues
Net sales $2,312,000
Interest revenue 28,000
Total revenues 2,340,000
Expenses
Cost of goods sold $1,289,000
Operating expenses 925,000
Interest expense 70,000
Loss on sale of equipment 10,000
Total expenses 2,294,000
Net income $ 46,000
Statement of retained earning
The statement of retained earnings is a financial statement prepared by corporations that details changes in the volume of retained earnings over some period. Retained earnings are profits held by a company in reserve in order to invest in future projects rather than distribute as dividends to shareholders.
This statement includes information regarding a firm’s retained earnings, along with the net income and amounts distributed to stockholders in the form of dividends. The retained earnings are calculated by adding net income to (or subtracting net losses from) the previous term’s retained earnings and then subtracting any net dividend(s) paid to the shareholders.
For example, a company may begin an accounting period with $7,000 of retained earnings. These are the retained earnings that have carried over from the previous accounting period. The company then brings in $5,000 in net income and makes a total payment of $2,000 in dividends.
Multi step income statement
Multi-step income statements are one of the two income statement formats businesses can use to report their profits. A multi-step income statement reports a company’s revenues, expenses and overall profit or loss for a specific reporting period. find out more: p&l profit and loss statement . It is a more detailed alternative to the single-step income statement and uses multiple equations to calculate a business’s net income.
A multi-step income statement also differs from an income statement in the way that it calculates net income. A single-step includes just one calculation to arrive at net income. Multi-step income statements, on the other hand, use multiple equations to calculate net income. In doing so, they also calculate gross profit and operating income, which aren’t included on a single-step income statement. In comparison, a single-step income statement gives a simple record of financial activity.
Conclusion
An income statement is a rich source of information about the key factors responsible for a company’s profitability. It gives you timely updates because it is generated much more frequently than any other statement. it shows a company’s expense, income, gains, and losses, which can be put into a mathematical equation to arrive at the net profit or loss for that time period. This information helps you make timely decisions to make sure that your business is on a good financial footing.
