Income Statement: How to Read and Use It

Posted On August 22, 2023

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The income statement, also known as the P&L (profit and loss) statement, is one of the crucial financial statements businesses use to evaluate their financial performance. When comparing it to the balance sheet, it’s essential to understand the differences and connections between them. The income statement showcases a company’s revenues, expenses, and net income for a specific period, while the balance sheet presents a snapshot of a company’s assets, liabilities, and equity at a particular point in time.

Revenue realized through secondary, noncore business activities is often referred to as nonoperating, recurring revenue. There is a direct link between the income statement and cash flow statement, especially in the operating activities section. This section starts with the net income from the income statement and adjusts it for non-cash items such as depreciation and changes in working capital, including accounts receivable, accounts payable, and inventory. Also called other sundry income, gains indicate the net money made from other activities, like the sale of long-term assets.

Breaking Down Expenses

For an investor looking to purchases shares of a technology manufacturer, comparing the statistics of these two companies yields a number of insights that are not obvious if viewed on a standalone basis. Amanda Bellucco-Chatham is an editor, writer, and fact-checker with years of experience researching personal finance topics. Specialties include general financial planning, career the focus of an income statement is on development, lending, retirement, tax preparation, and credit. The process of amortization is usually done using the straight-line method, wherein the cost of the intangible asset is divided by its useful life, resulting in an annual amortization expense. Earnings per share are computed by dividing the net income figure by the number of weighted average shares outstanding.

In this section, we will discuss the importance of depreciation and amortization in an income statement and how they impact the financial health of a business. Both depreciation and amortization affect the value of a company’s assets, with depreciation relating to tangible assets and amortization focusing on intangible assets. Another important aspect of evaluating profitability is comparing operating income with net income. Operating income, also known as operating profit or operating earnings, represents the income generated from the regular business operations, excluding any non-operating income or expenses. It includes readings on a company’s operations, the efficiency of its management, the possible leaky areas that may be eroding profits, and whether the company is performing in line with industry peers.

Differences between an income statement vs. balance sheet

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. In an income statement, this figure is typically displayed at the top section – ensuring it is one of the first things to be noticed. Using software allows you to automatically track and organize your business’s accounting data so you can access and review income statements.

This figure represents the earnings before interest and taxes (EBIT) for its core business activities and is again used later to derive the net income. 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.

Comparing Income Statement to Other Financial Statements

Many small businesses need financial statements to apply for credit or to provide financial information to a potential lender. Using an income statement to demonstrate a consistent history of income and profitability can make this process easier. By using the above metrics and indicators, you can confidently read and analyze an income statement, making informed decisions about a company’s financial performance and stability. By carefully examining both total revenue and net sales, readers can gain valuable insights into a company’s financial health. Though calculations involve simple additions and subtractions, the order in which the various entries appear in the statement and their relationships often get repetitive and complicated.

A single-step income statement is a simplified approach to viewing your net profit or loss. Single-step income statements include revenue, gains, expenses, and losses, and they strictly show operating costs. When analyzing an income statement, it’s essential to understand the income before taxes.

Operating Revenue

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. The income statement focuses on the revenue, expenses, gains, and losses reported by a company during a particular period. While an income statement displays a company’s financial performance over a specific period (e.g. a quarter or a year), a balance sheet provides a snapshot of a company’s financial position at a given moment in time. The balance sheet consists of assets, liabilities, and owners’ equity, revealing what the company owns, what it owes, and the equity owned by shareholders. Depreciation is an accounting method that allows companies to allocate the cost of tangible assets, such as machinery, vehicles, and equipment, over their useful life.

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