What is an Income Statement?
The income statement is one of the three primary financial statements used to assess a companyâs performance and financial position (the two others being the balance sheet and the cash flow statement). The income statement summarizes the revenues and expenses generated by the company over the entire reporting period.
The income statement is also known as a , statement of and loss (P&L) statementearnings, statement of operations or statement of income.
Income Statement Example
The basic formula on which an income statement is based is:
â Expenses =
All companies need to generate debt and owed to the government. After the costs of doing business are paid, the amount left over is called net income. Net income is theoretically available to shareholders, though instead of paying out dividends, the firm's management often chooses to retain earnings for future in the business.to stay in business. are used to pay expenses, interest payments on
Income statements are organized similarly no matter what company is being analyzed, but some line items may differ depending on the industry. The basic outline is shown in the following example:
|Company XYZ's Annual Income Statement|
Anyone interested in active investing, picking or investigating the financial health of a company must know how to read , including the income statement. The importance of the information contained in the income statement cannot be overemphasized.
A firm's ability or inability to generate term is the key driver of and prices. Operating profit (EBIT) is the source of debt repayment, and if a company can't generate enough EBIT to pay its debt obligations, it have to enter bankruptcy or sell itself.over the long
is the source of compensation to shareholders (owners of the company), and if a company cannot generate enough to compensate owners for the risks they've taken, the value of the owners' plummet. Conversely, if a company is healthy and growing, higher and prices reflect the increased availability of .
Pleasethat earnings/net income/ are not the same as or . It is possible for a firm to be profitable on the income statement, but not be generating , and vice versa. To see a company's , you need to examine its statement of
[Recommended reading: Financial Statement Analysis For Beginners]
Multi-Step Income Statement
A multi-step income statement, also called a multi-step profit and loss statement, lists and separates a company's operating revenues/expenses from its non-operating revenues/expenses, gains, and miscellaneous income and cost items.
The operating revenues and operating expenses represent a business' income and costs that are directly involved in operations -- such as income from a sale or service, and expenses related to salaries, rent, and supplies, among other things. At the top of the operating income section, a company lists its revenue, which is sometimes followed by its costs of goods sold/cost of revenue. The difference of these two items results in a company's gross profit.
Non-operating revenue is considered business income that does not play a part in the company's main business function, and may include interest income, investment income, or property gains. Non-operating expenses also do not relate to a company's day-to-day business function, and may include interest expense on outstanding loans, income taxes, investment losses, or legal fees/legal settlement costs.