WHAT IS AN INCOME STATEMENT?

What is an Income Statement

It is a financial statement that depicts the company’s revenue, expenses, net income over a period of time. An income statement is also called a Profit and loss (P&L)statement, statement of operations, or statement of earnings.

Equation of income statement is:

  Revenue – Expenses = Net income

Every company prepares an income statement according to the standards and no two firms’ will have the same income statement. The main purpose of creating an income statement is to provide an idea about the financial performance of the company to the parties interested.

Many kinds of  useful analysis and ratios can be derived from the income statement data.

A firm can represent its financial data in a single-step format or multi-step. In a single-step format, all revenues and expenses are grouped together. The multi-step format includes gross profit.

COMPONENTS OF INCOME STATEMENT:

  • REVENUE:

It is the amount reported from sales of goods and services in the course of business. Revenue adjusted for estimated returns and allowances is known as net revenue.

  • COST OF GOODS SOLD(COGS):

It is the direct expenses of the firm in producing the goods.

Example: cost of raw material, labor, carriage in etc.,

  • GROSS PROFIT:

Revenue minus COGS is gross profit.

Gross Profit = Revenue – Cost of goods sold

  • EXPENSES:

Expenses are the amount incurred in generating revenues and include operating expenses, interest, and taxes. Expenses are grouped together by nature and function.

  • NON OPERATING INCOME/EXPENSES:

The income/expense generated by the firm other than from it’s core operations. Separating both operating and non-operating incomes and expenses gives investors a clear idea about the firm.

  • NET INCOME:

It is the earnings of the firm after deducting all the expenses from revenue.

Net Profit = Total Revenue – Total Expenses

FORMAT OF INCOME STATEMENT
ABC COMPANY INCOME STATEMENT FOR THE YEAR ENDED DECEMBER 2020
Revenue579,312
Cost of goods sold(362,520)
Gross profit216,792
Selling/Administrative expenses(109,560)
Depreciation(69,008)
Operating Profit38,224
Interest expense(2,462)
Income tax expense(14,305)
Income from continuing operations21,457
Earnings /losses from discontinued operations1,106
Net income22,563