What is the income statement?

Gross profit is what’s left of your revenue after deducting the cost of goods sold (COGS)—the direct costs related to producing goods or providing services. Contribution margin is the amount remaining after all variable expenses are subtracted from revenues. It indicates the amount available from sales to cover the fixed expenses and profit. The amount of a long-term asset’s cost that has been allocated to Depreciation Expense since the time that the asset was acquired. Accumulated Depreciation is a long-term contra asset account (an asset account with a credit balance) that is reported on the balance sheet under the heading Property, Plant, and Equipment.

How to Build an Income Statement in a Financial Model

• There is no gross profit subtotal, as the cost of sales is grouped with all other expenses, which include fulfillment, marketing, technology, content, general and administration (G&A), and other expenses.
• The costs in the production of the goods are included in the cost of sales (also known as the cost of goods sold).
• It’s one of the three main financial statements, alongside the balance sheet and cash flow statement, and serves as a crucial indicator of a company’s operational health.
• We will be referring to the following income statement for Example Corporation as we continue our explanation of the income statement.
• 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.
• The statement of cash flows (or cash flow statement) is one of the main financial statements (along with the income statement and balance sheet).

Most accounting teams create an income statement monthly, quarterly, or annually. Annual income reports are essential for comparing revenue and expenses from year to year, but you should generate an income statement more than once a year. The income statement serves as a tool to understand the profitability of your business. The income statement can also help you make decisions about your spending and overall management of business operations. Income statements should be generated quarterly and annually to provide visibility throughout the year.

W9 Form Basics: Essential Guide To Understanding Taxpayer Identification

Sifting through operating expenses is like combing through a box of assorted objects to sort out what’s absolutely necessary for running your daily operations. These are the ongoing costs that are not directly tied to the production of your goods or services, but they’re vital for keeping the lights on and the doors open. Non-operating income includes gains or losses not tied to day-to-day operations, such as interest income, investment gains, or the sale of company assets.

Revenue

• After almost a decade of experience in public accounting, he created MyAccountingCourse.com to help people learn accounting & finance, pass the CPA exam, and start their career.
• The line items on the income statement example above are pretty standard.
• It can instill confidence among stakeholders and pave the road for future financial planning.
• I’m not an accountant, but I’ve worked with enough financial professionals to know that preparing an income statement isn’t fast and easy.
• The profit or loss is determined by taking all revenues and subtracting all expenses from both operating and non-operating activities.

An income statement is among the most important financial statements, and a crucial step in the accounting cycle. It’s also the first report that needs to be prepared in the 3-statement model of accounting, which also includes the balance sheet and cash flow statement. 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.

Historical cost principle

When inventory items are acquired or produced at varying costs, the company will need to make an assumption on how to flow the changing costs. To illustrate, assume a company had purchased equipment 8 years ago at a cost of $70,000 and its accumulated depreciation on the date of the sale was $55,000. The combination or net of these two amounts is $15,000, which is known as the equipment’s book value or carrying value. The selling, general and administrative expenses are commonly referred to as SG&A. This gives the reader two years of previous income statement amounts to put the most recent year’s amounts in perspective.

The balance sheet reports information as of a date (a point in time). The income statement, statement of cash flows, statement of comprehensive income, and the statement of stockholders’ equity report information for a period of time (or time interval) such as a year, quarter, or month. Usually financial statements refer to the balance sheet, income statement, statement of comprehensive income, statement of cash flows, and statement of stockholders’ equity.

A similar concept applies under LIFO, comparing cost to market value. Calculating cost of goods sold is a common stumbling block for entrepreneurs. Remember, COGS includes all expenses incurred directly relating to the cost of goods you sell. Finally, you have every figure necessary to calculate your net profit or net income. Simply subtract your interest and tax expenses from your pre-tax income to arrive at your net income — or your true “bottom line”.

Step #1: Begin with a reporting period

In both income statement formats, revenues are always presented before expenses. Creditors, on the other hand, aren’t as concerned about profitability as investors are. Creditors are more concerned with a company’s cash flow and if they are generating enough income to pay back their loans. External users like investors and creditors, on the other hand, are people outside of the company who have no source of financial information about the company except published reports. Investors want to know how profitable a company is and whether it will grow and become more profitable in the future.

A manufacturer’s cost of sales is the cost of producing the goods that were sold. This includes the cost of raw materials, direct labor, and manufacturing overhead related to the items sold. Determining the manufacturer’s cost of goods is complicated by the need to allocate the manufacturing overhead costs.

Method #1: Vertical analysis

You’ll often need to subtract returns, refunds, or discounts given to customers. This step the income statement is crucial to arrive at the net sales figure, shunning the illusion of higher earnings and presenting the reality of the cash tugging at your register bell. Most importantly, remember to start and end your reporting period consistently. If you’re preparing a calendar year report, it typically starts on January 1st and ends on December 31st. If you follow a fiscal year model, your dates can shift, starting any day of the year, as long as they cover a full year.

Step #2: Generate a trial balance report

Common size income statements make it easier to compare trends and changes in your business. This analysis ultimately tells the Village Shipping Inc. company that they did not make as many sales as the year before. Fortunately,  total expenses also dropped, so the company was still able to turn a profit. But if you’re a publicly traded company, you must issue an income statement every quarter to send to the U.S. The revenue section (sometimes called “the top line”) reflects the money you generate from regular business operations and activities, like sales.

Revenue growth is not just about increasing sales; it indicates a company’s ability to expand its market presence and competitiveness. While a rising revenue line is a good sign, understanding how that growth is achieved is crucial. Is it driven by an increase in sales volume, price hikes, or a new product launch? A company growing revenue primarily through higher prices might indicate strong brand positioning or market control. Conversely, growth driven by volume can suggest effective market penetration and demand.