102-16 What Is An Income Statement & How To Analyze It

What is an income statement?

The income statement is also known as the profit and loss statement (P&L). This document tells us what made the company profitable or unprofitable for the given time period. It lists the revenue generated, the cost of generating that revenue, and deducts any taxes paid on that revenue.

The amount of money left after expenses and taxes is known as income.

Course 102 - Stock Market Investing
What Is An Income Statement & How To Analyze It

What is the purpose of an income statement?

The main purpose of an income statement is to provide a summary of a company’s revenue and expenses over a specific period. It can help investors and other interested parties better understand a company’s financial stability and performance. Additionally, the statement can be used to assess how well a company is performing relative to its competitors.

How to read an income statement?

Reading an income statement is simple. You must look at the different line items and understand what they mean. The most important line item on an income statement is revenue, which is the amount of money a company brings in through its sales. Other line items include costs of goods sold, operating expenses, and net income. Understanding these line items gives you a good sense of how a company is performing financially.

What items are on an income statement?

An income statement is a financial statement that shows how much money a company has earned over a specific period. It includes revenue, expenses, and profit or loss.

Example Income Statement For Company ABC

(Figures USD)

2020

2021

Net Sales

500,000

1,000,000

Cost of Sales

(250,000)

(300,000)

Gross Profit

250,000

700,000

Operating Expenses (SG&A)

(50,000)

(70,000)

Operating Income

200,000

630,000

Other Income (Expense)

20,000

30,000

Extraordinary Gain (Loss)

Interest Expense

(5,000)

(5,000)

Net Profit Before Taxes (Pretax Income)

215,000

655,000

Income Taxes

(75,000)

(200,000)

Net Income

140,000

455,000

What are net sales on the income statement?

Net sales on the income statement are the total revenue generated by a company through the sale of its products and services. This figure is typically found at the bottom of the statement and represents the amount of money that has been brought in after all costs associated with generating this revenue has been deducted.

Net Sales is the total amount of cash or equivalent made from the sale of goods or services.

What is the cost of sales on the income statement?

The cost of sales on the income statement is the total amount of money a company has spent to generate its revenue. This figure includes the cost of goods sold and any associated operating costs. It is typically found just above net sales on the income statement and represents the amount of money that has been expended to bring in revenue.

The cost of sales is the total cost of manufacture, raw materials, equipment, employees, building maintenance, and depreciation.

What is the gross profit on the income statement?

The Gross profit on the income statement is the difference between net sales and the cost of sales. This figure represents the amount of money a company has earned after accounting for the costs associated with generating its revenue. It is typically found in the middle of the income statement and can be used to gauge a company’s overall profitability.

What are operating expenses on the income statement?

The operating expenses on the income statement are the costs associated with running a company’s day-to-day operations. This figure includes things such as salaries, rent, and advertising costs. It is typically found just above the gross profit on the income statement and represents the amount of money that has been spent on maintaining a company’s revenue stream.

What is operating income on the income statement?

The operating income on the income statement is the difference between operating expenses and the gross profit. This figure represents the amount of money a company has earned after accounting for the costs associated with running its day-to-day operations. It is typically found at the very top of the income statement and can be used to gauge a company’s overall profitability.

What is the interest expense on the income statement?

The Interest expense on the income statement is the amount of money that a company has spent to finance its operations. This figure includes the interest payments on any outstanding debt and the interest payments on outstanding investments. It is typically found just below the operating income on the income statement. It represents the amount of money that has been expended to maintain a company’s revenue stream.

What is the Net profit on the income statement?

The Net profit on the income statement is the difference between operating income and interest expense. This figure represents the amount of money a company has earned after accounting for the costs associated with running its day-to-day operations and financing them. It is typically found at the very bottom of the income statement and can be used to gauge a company’s overall profitability.

What are taxes on the income statement?

The taxes on the income statement are the amount of money a company has paid to the government to generate revenue. This figure includes both federal and state taxes, as well as any other applicable taxes. It is typically found just below net profit on the income statement. It represents the amount of money that has been paid to the government to maintain a company’s revenue stream.

What is net income on the income statement?

The Net income on the income statement is the difference between net profit and taxes. This figure represents the amount of money a company has earned after accounting for the costs associated with running its day-to-day operations, financing its operations, and paying its taxes. It is typically found at the very bottom of the income statement and can be used to gauge a company’s overall profitability.

How to analyze an income statement

Now that you know how to read an income statement, you need to know how to analyze it. There are a few things you should look for when analyzing an income statement.

The first thing to look at is revenue. You want to make sure that the company is bringing in enough money through its sales to cover its costs. You can do this by comparing the revenue to the costs of goods sold. If the company’s revenue is less than its costs of goods sold, then it is not making a profit.

Another thing to look at is operating expenses. Operating expenses include things like marketing, administrative costs, and rent. You want to ensure these expenses are not too high, affecting a company’s profits.

Finally, you want to look at net income. This is the amount of money a company has left over after paying its expenses. A high net income is good news for a company, as it means it is making more money than it is spending. A low net income is bad news, as it means the company is losing money.

Is an income statement the same as profit and loss?

No, an income statement is not the same as profit and loss. An income statement shows how much a company has earned over time. It includes revenue, expenses, and profit or loss. Profit and loss is a different calculation that shows how much money a company has made or lost over a specific period.

What is a multi-step income statement?

A multi-step income statement is an income statement that shows how a company has made or lost money over a specific period of time. It includes revenue, expenses, and profit or loss. It breaks down the revenue and expenses into different categories to understand how a company performs financially.

What is a pro forma income statement?

A pro forma income statement is an income statement that shows how a company will make or lose money over a specific period of time. It includes revenue, expenses, and profit or loss. It breaks down the revenue and expenses into different categories to understand how a company performs financially.

The difference between a pro forma and a multi-step income statement

The difference between a pro forma and a multi-step income statement is that a pro forma income statement shows how a company will make or lose money over a specific period of time.

A multi-step income statement shows how a company has made or lost money over a specific period of time. It includes revenue, expenses, and profit or loss. It breaks down the revenue and expenses into different categories to understand how a company performs financially.

Red flags on the income statement

Special Note: Always keep a watchful eye out for anything marked as special items or extraordinary expenses. These are allowed for in the generally accepted accounting principles (GAAP) but only as one-off charges for restructuring or closing business units. E.g., redundancy payments. These may be significant enough to alter the post-tax profit figure from a healthy profit to a minor loss. It would be best if you considered these in your valuation of a company.

Income Statement FAQs

Do accounts receivable go on an income statement?

No, accounts receivable do not go on an income statement. They are a part of the balance sheet.

Does unearned revenue go on the income statement?

No, unearned revenue does not go on the income statement. It is a part of the balance sheet.

Is depreciation expense on the income statement?

Depreciation expense is not on the income statement. It is a part of the balance sheet.

Do accounts receivable go on the income statement?

No, accounts receivable do not go on the income statement. They are a part of the balance sheet.

Are dividends on the income statement?

No, dividends are not on the income statement. They are a part of the balance sheet.

Are supplies an expense on the income statement?

No, supplies are not an expense on the income statement. They are a part of the balance sheet.

Summary

The major categories within an income statement are revenue, expenses, and net income. These are the three most important metrics you should consider when analyzing an income statement. Now you are familiar with the income statement. The next lesson covers the balance sheet.

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