The income statement is one of the important data that reflects the performance of a company, as the income statement provides users of the financial statements with valuable information on various aspects of the company’s performance, including the evaluation of the company’s activities, the efficiency of management, the determination of provisions that may lead to erosion of profits, and the extent of compatibility The company’s performance with its counterparts in the industry, and in this article on fastcoo, we will show you what is meant by income statements and how to read them with a sample presentation.
What is an Income Statement?
The income statement is a list that is prepared to know the result of the companies’ activity in terms of gain or loss, and it is considered one of the most important basic financial statements in the field of business and financial accounting, it is a statement or a report that displays the financial performance of companies or factories in a specific period of time or during a financial year, and this is done through the enterprise accounts program.
The importance of the income statement is due to knowing the net income from a specific project and providing business owners and companies with information, data and cash flows in addition to other information useful for making the right economic decisions.
Income statement goals
One of the most important goals of the income statement is:
- Providing the owners of companies and factories with information that helps in the process of forecasting, comparing and evaluating the strength of project revenues.
- Provide useful information to judge the management’s ability to use project resources effectively in order to achieve the primary objective of the project, which is to increase revenues.
- Providing real and correct information regarding operational processes and economic events, which are certainly useful in the process of forecasting and assessing the strength of revenues.
- Determine the amount of tax owed by the facility.
- Enabling owners of companies and factories to know the results of their investments.
- Facilitating the task of creditors in monitoring the integrity of the institution’s conditions and ensuring their funds.
- Facilitating the task of management in planning, controlling and distributing profits.
- Enable analysts to evaluate investment alternatives in various projects.
Income Statement Structure
The income statement provides the users of the financial statements with information on four basic elements: revenues, expenses, gains, and losses. Not included in the income statement are cash receipts (cash received by the company) or cash payments (money paid by the company). The income statement begins with revenues (sales) and ends with net income, which is the most important element to which the attention of the shareholders is directed. Here’s the structure of the income statement:
1. Company revenues
They are the cash flows resulting from the companies ’activity as a result of practicing their main activity through sales or their investment projects and it is considered the main element to which attention is directed because it is the main indicator of the success of the institution
2. Cost of sales (cost of goods sold)
It is the financial value that the company needs in the production or investment process and is represented in the financial expenses that contributed to achieving revenues
3. Operating expenses
They are the expenses that the company incurs in order to obtain revenues, and they are divided into administrative and general expenses such as salaries, wages, electricity, water and phone bills as well as maintenance expenses, selling and marketing expenses such as advertising and sales expenses, in addition to the commissions of representatives or sales agents
4. Other revenues and gains
They are revenues or gains that the company receives as a result of operations and activities that are not related to the company’s activity, such as investing in the stock exchange or profits from selling fixed assets or renting part of its real estate
5. Other expenses and losses
They are the expenses and losses that the company incurred as a result of practicing activities that have nothing to do with the main field, such as losses resulting from entering the stock exchange and a loss in selling fixed assets and so on.
Reading Standard Income Statements
The income statement is easier to understand and less complex than the balance sheet. Nevertheless, it is the most analytical part of the quarterly financial statements. This is due to the fact that it separates the sources of the company’s profit based on its performance from selling products or providing its services or the returns on its investments. To explain this, the income statement clarifies the amount of revenue entering the company from its sales (revenues), and the amount of funds going out of it to cover the costs of these sales (expenses).
Also read about : cost of goods sold
Reading the income statement is not limited to deducting total expenditures from revenues, as the company in general has more than one source of revenue and many different types of expenses, and the company explains in the income statement in detail the various sources of its revenues and expenditures that reflect a clear picture of the company’s performance, and we review in the following the most important points that Included in the income statement:
- Revenue and sales.
- Gross profit.
- Net profit.
- Operating profit (income from major operations).
- Gains and losses from non-major operations.
- Earning the share.
Upon understanding these numbers and their relationship with each other, the investor can determine the strength of the company’s performance from its weakness, for example, the stumbling company – which certainly does not represent a good investment – suffers from increasing and continuous expenses and continuously decreasing revenues, which reduces its total profit and net income.
Read about : Cross-Docking
As the individual gets profit through his work or the returns on his investments, the company can also get profit from selling its products or services or the returns on its investments, and some companies have one source of profit, and some of them can have more than one source.
The income statement displays the company’s revenues and sales. Through tracking the list, it is possible to know the size of the company’s financial profit with precision. It is also possible to know from which business sources for the company the profit is achieved.
Revenue is the total money a company generates from its core business, which involves selling the goods and services it produces.
If any company could reach a way to develop and manufacture products and provide services without incurring any expenses, then it would be the richest company in the world, but reality proves that spending money is a must to earn more money, and to reach the calculation of the company’s total profits or (total losses) must From deducting its direct expenses from its revenues.
Production costs are not the only costs that the company must pay to succeed, as after production the product must be marketed and sold, and these works of course involve other expenses and costs, in addition to marketing and advertising expenses, the company is obligated to pay the salaries of its employees and office equipment in addition to paying its expenses Administrative, and the company’s operating profit (or operating loss) can be arrived at by deducting all the operating costs indicated from the total profits.
The company has to pay other expenses, and when the company deducts these expenses from the operating profit, and adds what it gets from revenues outside its activity, the remainder constitutes the net profit of the company, and from the clear indications that the company’s performance is going well, the increase in net profit from a quarter To another.
Types of common income statement formulas
Corporations declare earned profits on the income statement, and there are two common income statement formats, as:
1. Multi-step income statement, which provides a detailed breakdown of each activity that affects profit.
2. One-step income statement, which provides essential parts of profit-making activities.
Multi step income statement
The multi step income statement has three parts, as:
- Sales revenue, which includes sales and cost of goods sold.
- Operating expenses, which include selling and administration expenses.
- Non-operating income or expenses, which include non-operating activities, such as interest income, interest expenses, and profits or losses on investment sales.
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Advantages of using a multi step income statement
While businesses can use either statement, the multi-step income statement is the most common. Business stakeholders often find the multi-step statement to be more informative and easier to read.
Multi step income statements provide three benefits from a one-step income statement, as:
- Firms can calculate gross profit easier, as the difference between sales and cost of goods sold on the statement is necessary for the calculation.
- The statement lists operating income that represents profits earned from normal business activities.
- Each section of the multi-step phrase can contain a positive or negative number, providing more information for making business decisions.
Income statement example
The income statement is the historical record that reflects the trading of business during a specific period, and shows the profit or loss achieved by a company, and what is the difference between the total income of the company and its total costs, and this is a simple income list that shows the financial performance in the years 2014 and 2015 and compares between them