Overview of the Income Statement
The income statement is one of the four basic financial statements that a company prepares each accounting cycle. The income statement reflects a company's operating performance. The income statement also shows changes in the company's assets and obligations. The important thing to remember about an income statement is that it represents a period of time. This contrasts with the balance sheet, which represents a single moment in time. The income statement is prepared on an accrual basis.
The income statement displays the revenues recognized for a specific period, and the cost and expenses charged against these revenues, including write offs (e.g., depreciation and amortization of various assets) and taxes.
The income statement is also referred to as a "profit and loss statement" (P&L), revenue statement, statement of financial performance, earnings statement, operating statement and statement of operations.
A Sample Income Statement
Expenses are listed on a company's income statement.
Purpose of the Income Statement
The purpose of the income statement is to show managers and investors whether the company made or lost money during the period being reported.
The income statement explains how the revenue, which is money received from the sale of products and services before expenses are taken out, is transformed into the net income. Net income is what is left after all the revenues and expenses have been accounted for, it is also known as "Net Profit. "
Types of Income Statement
There are two types of income statement, a single-step income statement and a multi-step income statement. The single-step income statement takes a simpler approach, totaling revenues and subtracting expenses to find the bottom line.
The multi-step income statement is more complex. It takes several steps to find the bottom line, starting with the gross profit. It then calculates operating expenses and, when deducted from the gross profit, yields income from operations. Adding to income from operations is the difference of other revenues and other expenses. When combined with income from operations, this yields income before taxes. The final step is to deduct taxes, which finally produces the net income for the period measured.
Operating vs. Non-operating Activities
Operating income occurs from any activity that is a direct result of its primary business, such as sales of goods and services.
Non-operating income, in accounting and finance, is gains or losses from sources not related to the typical activities of the business or organization. Non-operating income can include gains or losses from investments, property or asset sales, currency exchange, and other atypical gains or losses. Non-operating income is generally not recurring and is therefore usually excluded or considered separately when evaluating performance over a period of time (e.g. a quarter or year).