What is an Income Statement
The income statement is one of the main financial statements all publicly traded organizations around the world generate on an regular basis as a reporting tool for stakeholders and the general public. The creation and maintenance of these statements is the primary responsibility of financial accountants.
The income statement (also referred to as a profit and loss account, or a profit and loss statement) answers some core questions regarding profitability and the overall utilization of raw materials to generate revenue exceeding the expenses involved. The income statement is therefore a linear assessment, starting with revenue and ending with net gains or losses, of the overall costs of a given production process. As a result, this statement is intrinsically describing a span of operational time, and the transformation of revenues into profits or losses over that given time period.
Wikimedian's Income Statement
Understanding an income statement is best accomplished by analyzing one. The above income statement is pulled directly from Wikipedia, and is the financial information they are offering to external stakeholders and the general public. The income statement starts with revenues, minuses costs and expenses, and results in a net gain or loss.
Why They Are Useful
The income statement is a critically useful tool, particularly for product managers, strategists, operational specialists, and investors. In short, incomes statements are useful because they demonstrate an organization's ability to turn revenues into usable cash flows (which will then be inserted into a cash flow statement on an ongoing basis). Profitability of operations is the key concept here, and it is a critical component of organizational success.
How To Create an Income Statement
As a financial accountant, understanding the inputs of an income statement is key to developing accurate and useful reports. Incomes statements can loosely be divided into the following subcategories:
Revenue
At the top, an organization should report overall revenue. The primary input here will be overall proceeds from sales, though the appreciation of assets or the acquisition of accounts receivable owed from a previous reporting period may also add to this number.
Expenses
Expenses are the overall costs of acquiring the above revenues. This can be divided into a few categories:
- Cost of Goods Sold (COGS) - All costs in material, labor, and overhead that are directly required for the production and/or manufacturing of a given good.
- Selling and General Administration (SG&A) - These costs are support costs, such as the salaries of HR staff, management, legal, accounting, marketing, and other broader corporate expenses that benefit the sale of a particular good.
- Depreciation/Amortization - Over time, fixed assets will decrease in value. This depreciation of assets is allocated as an expense over the lifetime of the assets being recorded.
- Research and Development (R&D) - Investment in the research and development of revenue-generating products will also be a business expense for the income statement.
Non-Operating Items
Other gains or losses, such as those from rent, income, patents, foreign exchange, goodwill, etc., should be included as unusual gains or losses. Financial costs from borrowing capital and taxes due will also be included in this section. An additional section of irregular items is added if necessary (though rarely), which could pertain to changing business locations (quite costly), discontinuing operations, or other unique scenarios that need to be reported but don't fit cleanly in any given line item.
Net Income
After all of the items have been added or subtracted accordingly from the starting revenue, the income statement will display the overall net income or net loss. This is where investors and stakeholders derive profit margin: net income/revenue. This margin of profitability is a useful input for the overall value of an organization's operational efficiency.