Income Statement: How to Read and Use It

The growth of the Web has seen more and more financial statements created in an electronic form which is exchangeable over the Web. These types of electronic financial statements have their drawbacks in that it still takes a human to read the information in order to reuse the information contained in a financial statement. Financial statements (or financial reports) are formal records of the financial activities and position of a business, person, or other entity.

• Learning how to read and understand an income statement can enable you to make more informed decisions about a company, whether it’s your own, your employer, or a potential investment.
• Vertical analysis refers to the method of financial analysis where each line item is listed as a percentage of a base figure within the statement.
• However, showing expenses by their function makes it easier to determine where costs are consumed within an organization, and so contributes to the control of costs.
• Here’s an income statement we’ve created for a hypothetical small business—Coffee Roaster Enterprises Inc., a small hobbyist coffee roastery.
• It typically covers expenses, profits, and losses incurred during that time frame.
• On the other hand, if you’re more concerned with measuring profitability in the short term or for specific projects or products, then the profit and loss statement is essential.

Our expert bookkeepers here at Bench have built an income statement template in Excel that you can use to assess the financial health of your business and turn your financial information into an income statement. These expenses are listed individually here, but some income statements will bundle these and other similar expenses together into one broad category called “Selling, General & Administrative Expenses” (SG&A). When a business owner makes an income statement for internal use only, they’ll sometimes refer to it as a “profit and loss statement” (or P&L). This type of analysis makes it simple to compare financial statements across periods and industries, and between companies, because you can see relative proportions. The income statement may be presented by itself on a single page, or it may be combined with other comprehensive income information. In the latter case, the report format is called a statement of comprehensive income.

What Is an Income Statement?

With 7.55 billion outstanding shares for Microsoft, its 2021 EPS came to $8.12 per share ($61.27 billion ÷ 7.55 billion). With Walmart having 2.79 billion outstanding shares that fiscal year, its EPS came to $4.90 per share ($13.67 billion ÷ 2.79 billion). A customer may take goods/services from a company on Sept. 28, which will lead to the revenue accounted for in September. The customer may be given a 30-day payment window due to his excellent credit and reputation, allowing until Oct. 28 to make the payment, which is when the receipts are accounted for.

Once you know how to read and assemble an income statement, you’ll be more equipped to understand the financial nuances of running your business. A balance sheet shows you how much you have (assets), how much you owe (liabilities), and how much is remains (equity). It’s a snapshot of your whole business as it stands at a specific point in time. Common size income statements make it easier to compare trends and changes in your business. Also sometimes referred to as “operating expenses,” these include rent, bank & ATM fee expenses, equipment expenses, marketing & advertising expenses, merchant fees, and any other expenses you need to make to keep your business going.

What Insights Should You Look for in an Income Statement?

But if you’re looking for a super simple financial report to calculate your company’s financial performance, single-step is the way to go. The Income Statement is one of a company’s core financial statements that shows 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. However, multi-step income statements have four steps, each arriving at a different level of income. A multi-step income statement calculates gross profit, operating income, pre-tax income, and net income (profit or loss). A profit and loss statement (P&L), also known as an income statement, is a financial report that shows a company’s revenues and expenses over a given period of time, usually a fiscal quarter or year.

Income statements are also carefully reviewed when a business wants to cut spending or determine strategies for growth. Competitors also may use them to gain insights about the success parameters of a company and sample income statement focus areas such as lifting R&D spending. The first section, titled Revenue, indicates that Microsoft’s gross (annual) profit, or gross margin, for the fiscal year ending June 30, 2021, was $115.86 billion.

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As you can see, Apple puts its revenue and the cost of revenue into two categories — products and services. Their top expenses are the cost of sales, research and development, selling, general and administrative, and taxes. The income statement is sometimes called the profit and loss statement, P&L statement, earnings statement, statement of operations, or some other variation of these terms.

This format shows the results of more than one reporting period in a set of adjacent columns. It is highly recommended for evaluating an organization’s results over time, through a simple side-by-side comparison of the reported information. 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 income statement may have minor variations between different companies, as expenses and income will be dependent on the type of operations or business conducted. However, there are several generic line items that are commonly seen in any income statement. Publicly traded companies also list the number of shares outstanding on the income statement.

The Importance of an Income Statement

Expenses of operation or operating expenses are simply the costs incurred in order to keep the business running. These may include rent, utilities, wages paid to employees, COGS, inventory and equipment costs – anything necessary to normal business operation. After understanding the difference between an income statement and a profit and loss statement, it’s crucial to know which one to use for making business decisions. Although laws differ from country to country, an audit of the financial statements of a public company is usually required for investment, financing, and tax purposes.

It’s important to be aware of the difference between single-step and multi-step income statements. It is one of the three core financial statements, the others being the balance sheet and the cash flow statement. The first section of the profit and loss statement lists all revenue generated by the company during the specific timeframe covered by the report. Revenue includes sales, interest earned on investments or loans, rent receipts from property owned by the business, or any other sources of income. Usually the company’s chief executive will write a letter to shareholders, describing management’s performance and the company’s financial highlights.