How to Prepare an Income Statement

For example, in cases where the organization is making bigger profit margins, it leads to more users analyzing their statements. The first benefit of the statement is that it shows the revenues made by the organization. One of the key indicators of performance of the money they make, and the statement shows that and when in the financial report, the notes allow the reader to see the breakdown. They aid gains and losses, which are usually extraordinary events (meaning they aren’t going to be consistent like sales). These gains and losses are also added to the income statement as they are inflows and outflows.

• Multi-step income statement – the multi-step statement separates expense accounts into more relevant and usable accounts based on their function.
• The main objective is to make a profit, and the statement displays the extent to which this objective has been successful.
• In both income statement formats, revenues are always presented before expenses.
• Financial analysis of an income statement can reveal that the costs of goods sold are falling, or that sales have been improving, while return on equity is rising.

For example, the payment they receive from selling products and/or services. When a large organization completes them, they also add the statement of comprehensive income, which includes any changes in equity as well as certain gains that have not yet been realized. Individuals also use the income statement as a way to find out how much they are making, and it allows them to make better decisions when they are budgeting and finding which expenses they should eliminate. Income statements can be prepared monthly, quarterly, or annually, depending on your reporting needs.

Join over 140,000 fellow entrepreneurs who receive expert advice for their small business finances

Like the name mentions, the figures on the balance sheet must match as any increases or decreases must be offset. Unlike the income statement, it does not provide information on how much money the company has made or lost, it only provides the amount of debt, cash and other assets that the company owns at that point in time. EBITDA is not normally included in the income statement of a company because it is not a metric accepted by Generally Accepted Accounting Principles (GAAP) as a measure of financial performance.

• It wouldn’t include money earned from selling a building or financial investments.
• Fixed assets on the balance sheet are reduced by accumulated depreciation, with depreciation expense included in the income statement.
• EBITDA converts EBIT (earnings before interest and taxes) to a cash basis by adding back the non-cash expenses depreciation and amortization.
• An income statement represents the primary way in which both company management and investors can assess the profitability of a company.
• Another use is to track income statement line items over time, to see if there are any spikes or dips in the data that indicate the presence of problems that management should address.

The income statement may have minor variations between different companies, as expenses and income will be dependent on the type of operations or business conducted. However, there are several generic line items that are commonly seen in any income statement. These are all expenses find grantmakers and nonprofit funders incurred for earning the average operating revenue linked to the primary activity of the business. They include the cost of goods sold (COGS); selling, general, and administrative (SG&A) expenses; depreciation or amortization; and research and development (R&D) expenses.

Calculate Interest and Taxes

The income statement is one of the most important financial statements because it details a company’s income and expenses over a specific period. This document communicates a wealth of information to those reading it—from key executives and stakeholders to investors and employees. Being able to read an income statement is important, but knowing how to generate one is just as critical. An income statement (also commonly known as a profit & loss statement, or P&L) is an integral component of a company’s financial statements, along with other reports such as the balance sheet. To understand an income statement, consider it in the context of financial statements.

How to Prepare an Income Statement

The bulk of those expenses fall under cost of sales, which is another name for the cost of goods sold. All public companies are required to file a Form 10-K each year with the SEC and Form 10-Q each quarter which include the income statement and other financial documents and disclosures. Earnings per share is a measure that compares a company’s net income compared to the outstanding shares. The price-to-earnings ratio, or P/E ratio, is another commonly used metric that factors in the company’s stock price in relation to EPS. When comparing companies, EPS and the P/E ratio can help differentiate two companies in the same category and help an investor make a more sound investing decision but both use the information given through the income statement. Creditors, on the other hand, aren’t as concerned about profitability as investors are.

The top benefits of using an income statement regularly in your business include:

While these financial statements are different, both the income statement and balance sheet along with the cash flow statement are still linked and should be used together to determine a more holistic financial picture of a company. An income statement is one of three major financial statements used to evaluate the health of a company, along with the balance sheet and cash flow statement. There are several terms you’ll need to understand in order to read an income statement. It’s important to note that there are several different types of income statements that are created for different reasons. For example, the year-end statement that is prepared annually for stockholders and potential investors doesn’t do much good for management while they are trying to run the company throughout the year.

Instead of looking at one income statement at a time from different periods, horizontal analysis compares them side-by-side in one view. For example, an increasing amount of sales from year to year might be attractive for a potential investor and can be found in the first line of an income statement. Conversely, if costs are rising this can also be seen on the income statement and may lead an investor to ask more questions about the long term profitability of the company. Investors and financial analysts also use the income statement to derive popular financial ratios like Earnings Per Share (EPS). As you can see, this example income statement is a single-step statement because it only lists expenses in one main category.

Occasional losses may be absorbed by the company if the company is in a good financial position. Net income (loss) flows to retained earnings (deficit) in the shareholders’ equity section of the balance sheet. Next, let’s bring all this info together and walk you through how to prepare an income statement.

To avoid giving too much information to competitors (from financial statements), general & administrative and sales expenses are sometimes combined as selling, general & administrative expenses (SG&A). This format shows the results of more than one reporting period in a set of adjacent columns. It is highly recommended for evaluating an organization’s results over time, through a simple side-by-side comparison of the reported information. A multi-step statement splits the business activities into operating and non-operating categories. The operating section includes sales, cost of goods sold, and all selling and admin expenses. The non-operating section includes other income or expenses like interest or insurance proceeds.