Income Statement: How to Read and Use It

A professional advisor will recommend action based on your personal circumstances and the most recent information available. A balance sheet shows you how much you have (assets), how much you owe (liabilities), and how much is remains (equity). It’s a snapshot of your whole business as it stands at a specific point in time. No items may be presented in the statement of comprehensive income (or in the income statement, if separately presented) or in the notes as extraordinary items. It helps managers and business owners point out which company expenses are growing at an unexpected rate and which of these expenses need to be cut down in the future. It also helps business owners determine whether they can generate high profit by increasing prices, decreasing costs, or both.

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1. Also called other sundry income, gains indicate the net money made from other activities like the sale of long-term assets.
2. Your income statement can be used both internally by you and anyone else within your business, or externally by stakeholders.
3. In addition to helping you determine your company’s current financial health, understanding income statements can help you predict future opportunities, decide on business strategy, and create meaningful team goals.
4. Revenue is all income generated by the sale of the business’ primary goods or services.
5. It can also be used to make decisions about inorganic or organic growth, company strategies, and analyst consensus.

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These include the net income realized from one-time nonbusiness activities, such as a company selling its old transportation van, unused land, or a subsidiary company. Net income—or loss—is what is left over after all revenues and expenses have been accounted for. If there is a positive sum (revenue was greater than expenses), it’s referred to as net income. If there’s a negative sum (expenses were greater than revenue during that period), then it’s referred to as net loss.

A single-step income statement is useful when your business does not have complex operations or only needs a simple statement that could report the net income of a business. Operating expenses totaling $37,000 were then deducted from the gross profit to arrive at the second level of profitability – operating profit which amounted to $6,000. Non-operating revenues are revenues that a company earns from activities that are not related to its primary business operations. Your revenue (aka income) is how much money your business earns from goods and services. This includes “operating” revenue, which is the revenue you make from selling goods and services, and “non-operating” revenue, which you make through behind-the-scenes operations, like maintenance.

Revenues

A single-step income statement is a simplified approach to viewing your net profit or loss. Single-step income statements include revenue, gains, expenses, and losses, and they strictly show operating costs. The income statement is also known as the statement of operations, profit and loss statement, and statement of earnings. The purpose of the income statement is to report a summary of a company’s revenues, expenses, gains, losses, and the resulting net income that occurred during a year, quarter, or other period of time.

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Some of these expenses may be written off on a tax return if they meet Internal Revenue Service (IRS) guidelines. Losses include money lost through activities outside of transactions for your primary goods or services. Gross profit is what’s left of your revenue after deducting the cost of goods sold (COGS)—the direct costs related inventory turnover ratio analysis to producing goods or providing services.

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Multi-step income statements separate operational revenues and expenses from non-operating ones. They’re a little more complicated but can be useful to get a better picture of how core business activities are driving profits. The income statement is one of the three important financial statements used for reporting a company’s financial performance over a set accounting period. The other two key statements are the balance sheet and the cash flow statement.

We may earn a commission when you click on a link or make a purchase through the links on our site. All of our content is based on objective analysis, and the opinions are our own. Income statements can be complex, but understanding the different components is crucial to interpretation. It helps analysts and research houses analyze, forecast, and perform corporate valuation in order to create future economic decisions in the company. This is because lenders want to know the ability of the company to generate revenue and profit, as well as its capacity to repay the loan.