Income Statement Analysis: How to Read an Income Statement

The P&L statement is one of three key financial statements a business releases, either quarterly, annually, or both if it’s a public company. It keeps track of profitability, income sources, expenses and budgets, allowing the company to take action against variances from projections. Investors and lenders pay attention to the P&L statement, especially when comparing different periods to determine the long-term trajectory of the company. An income statement complements the balance sheet and other standard financial statements. For instance, the cash flow statement shows how money moves in and out of your business and can act as a bridge between the income statement and the balance sheet. More than one company, especially young and growing ones, have looked like superstars on their income statements, but have been forced to cease operations for lack of cash.

Our mission is to empower readers with the most factual and reliable financial information possible to help them make informed decisions for their individual needs. We follow strict ethical journalism practices, which includes presenting unbiased information and citing reliable, attributed resources. All three documents must be reviewed together to get a clear picture of the financial health of the business. 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.

Determine the Cost of Goods Sold

For small businesses, cash flow is often more important than profits or assets. When used in conjunction with the other financial statements, income statements are a great way to get a clear view of your cash flow. Typically, multi-step income statements are used by larger businesses with more complex finances. However, multi-step income statements can benefit small businesses that have a large variety of revenue streams. Below are several ways multi-step income statements can benefit your small business. For small businesses with few income streams, we recommend generating single-step income statements on a regular basis, and a multi-step income statement annually.

It starts with the top-line item which is the sales revenue amounting to $90,000. These include dividend income, and proceeds from sale of extraordinary items. It includes marketing costs, rent, https://simple-accounting.org/becoming-a-certified-bookkeeper-step-by-step/ inventory costs, equipment, payroll, step costs, insurance, and funds intended for research and development. However, it uses multiple equations to determine the net profit of the company.

Example of an Income Statement

As a reminder, a common method of formatting such data is to color any hard-coded input in blue while coloring calculated data or linking data in black. An Bookkeeping for Independent Contractors: Everything You Need to Know helps business owners decide whether they can generate profit by increasing revenues, by decreasing costs, or both. It also  shows the effectiveness of the strategies that the business set at the beginning of a financial period. The business owners can refer to this document to see if the strategies have paid off. Based on their analysis, they can come up with the best solutions to yield more profit.

Although this brochure discusses each financial statement separately, keep in mind that they are all related. The changes in assets and liabilities that you see on the balance sheet are also reflected in the revenues and expenses that you see on the income statement, which result in the company’s gains or losses. Cash flows provide more information about cash assets listed on a balance sheet and are related, but not equivalent, to net income shown on the income statement. And information is the investor’s best tool when it comes to investing wisely. Publicly-traded and most privately-held companies present detailed financial statements prepared following GAAP. Most businesses use a multi step income statement which is more detailed than a single step or simple income statement.

Income Statement Example

Income statement evaluates the profit or loss of a business over a period of time, whereas balance sheets show the financial position of a business at a specific point in time. The other two important financial statements are the balance sheet and cash flow statement. The multi-step income statement reflects comprehensively the three levels of profitability – gross profit, operating profit, and net profit. Basically, an income statement is a great tool for businesses of all sizes because it shows a company’s financial performance and can help them improve profitability. A single-step income statement, on the other hand, is a little more straightforward. It adds up your total revenue then subtracts your total expenses to get your net income.

• EBITDA converts EBIT (earnings before interest and taxes) to a cash basis by adding back the non-cash expenses depreciation and amortization.
• To calculate EPS, you take the total net income and divide it by the number of outstanding shares of the company.
• An income statement represents a period of time (as does the cash flow statement).
• Often shortened to “COGS,” this is how much it cost to produce all of the goods or services you sold to your customers.
• Functional area operating expenses, often listed as line items on an income statement, include general and administrative expenses, sales and marketing expenses, and research and development expenses.
• A total of $560 million in selling and operating expenses, and $293 million in general and administrative expenses, were subtracted from that profit, leaving an operating income of $765 million.