What Is an Income Statement?
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Income Statement Definition
A company’s income statement records a company’s performance over a period of time, usually three months.
The other two are the balance sheet and the cash flow statement.
It should not be confused with the balance sheet, which records the state of a company’s funds at a single point in time.
Common Items on the Income Statement
Some common income statement items include:
- Revenue / Sales: This item counts all the income earned from selling products or providing services.
- COGS: COGS, or the cost of goods sold, aggregates any and all costs associated with the production of a product, such as labor and materials. For businesses that provide a service, this can also be called cost of sales.
- Gross Profit: This is the amount of earnings a company has after subtracting COGS from total revenue.
- Marketing, Advertising, and Promotion: All costs associated with the sale of products are lumped together.
- General and Administrative Expenses: All indirect costs that are nonetheless associated with running a business fall under this category. Salaries, building rent, travel expenses, and so on all fall under general and administrative expenses.
- Operating Income: Also called EBIT, or earnings before interest and taxes, operating income is the income earned from regular business operations.
- Interest and Taxes: Interest paid on outstanding loans and income taxes are subtracted from operating income. Companies that also earn interest income will often record it as a separate item.
- Other Income / Expenses: Any sources of income or expenses that don’t fit into the above categories, such as costs that are unique to an industry or are one-time, are covered by this category. Research and development, gains or losses from the sale of assets, and more are accounted for in this category.
- Net Income: After all expenses and revenues are accounted for, the final value is recorded as net income.
Some other line items that may or may not be included on an income statement are depreciation and amortization where applicable, EBITDA, and earnings per share.
Not all income statements are identical. The items that companies include, and how the statements are organized, depends on the particular needs of a compan
Examples of Income Statement
Because the income statement offers a very black and white perspective on a company’s absolute profits and its absolute expenses, it is useful when comparing the performance of two similar companies.
Two competing mature car companies, for example, would be in the same industry and have a similar scale, so they can be expected to have similar assets and liabilities.
Therefore, if one company was drastically outperforming the other, it could indicate a problem with the management of resources and its ability to generate profit.
Income Statement in Summary
The income statement is where accountants record a company’s net income, or the total amount of money a company has gained during a period.
Net income can be calculated from other items found on the income statement using the equation Net Income = (Revenue + Gains) – (Expenses + Losses).
If a company experienced a bad quarter, they could also record a net loss, which would show up on the income statement as well.
The income statement of a public company will also record its earnings per share.
Earnings per share can be derived by dividing the net income by the number of shares held.
This is a significant indicator for investors since it shows how much the investor needs to pay relative to earnings produced.
Comparisons to previous income statements to see how much the earnings per share has grown.