Income Statement

The Income Statement, one of a company's main financial statements, shows profit and loss over a given period of time. The profit or loss is derived after subtracting all expenses related to both operating and non-operating operations.

One of the three statements used in accounting and corporate finance, including financial modelling, is the income statement. The statement provides a clear and logical breakdown of the company's revenue, expenses, gross profit, selling and administrative costs, other expenditures and income, taxes paid, and net profit.

Understanding the Income Statement

An essential component of the corporate performance reports that must be reported to the U.S. Securities and Exchange Commission is the income statement (SEC). The income statement reports income over a certain time period, typically a quarter or a year, and its heading specifies the duration, for example, "For the (fiscal) year/quarter ended June 30, 2021," while a balance sheet gives a snapshot of a company's finances as of a specific date.

The income statement focuses on four key items:

  • Revenue
  • Expenses
  • Gains
  • Losses.

It does not distinguish between cash and non-cash receipts (cash sales versus credit sales) or cash versus non-cash payments or disbursements (purchases in cash vs. purchases on credit). Sales information is the first thing that is calculated, followed by net income and eventually earnings per share (EPS). Fundamentally, it describes the process by which the company's net revenue is converted into net profitability (profit or loss).

Income Statement Structure

The following formulas are used to determine net income mathematically:

Net Income = (Revenue + Gains) - (Expenses + Losses)

Revenue and Gains

The income statement includes the following information, though its format may change based on regional regulatory requirements, the business's varied scope, and the accompanying operating activities:

_Operating Revenue: _Operating revenue is a term frequently used to describe revenue generated by core activities.

_Non-Operating Revenue: _Non-operating, recurring revenue is a term frequently used to describe revenue generated by ancillary, noncore company activity.

**Gains: **Gains, also known as other income, are the net proceeds from other operations like the sale of long-term assets.

Expenses and Losses

Expenses are the costs incurred by a business to maintain operations and generate profits. If they comply with Internal Revenue Service (IRS) regulations, certain of these expenses may be deducted from income on a tax return.

  1. _Primary-Activity Expenses: _All of these costs were incurred in order to generate the typical operational revenue associated with the business's main activity. Selling, general, and administrative (SG&A) expenses and cost of goods sold (COGS) charges are some examples.
  2. _Secondary-Activity Expenses: _These are all costs associated with non-core business operations, such as interest on loans.
  3. _Losses as Expenses: _These are all costs associated with a loss-making sale of long-term assets, one-time charges, unexpected costs, or expenditures associated with legal actions.

Key Takeaways

  • Together with the balance sheet and the cash flow statement, an income statement is one of the three key financial statements that presents a company's financial performance for a certain accounting period.
  • The revenue, costs, profits, and losses a company experiences over a specific time period are the main topics of the income statement.
  • An income statement offers useful information about a company's operations, managerial effectiveness, underperforming industries, and performance in comparison to competitors.
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