A Detailed Income Statement Exampleindustriuscfo.com /income-statement-example/

Understanding Your Income Statement

An income statement is typically prepared at the end of a business period (such as a Fiscal Year orQuarter) to assess profit or loss. It can be thought of like a motion picture. It reports how a companyperformed during the period presented, and shows whether that company’s operations have resulted in aprofit or loss. Therefore, it shows how much money a company made and spent over the period. Theperiod is shown in the header of the income statement.

To state this another way, it is a financial statement that shows how much revenue a company earned overa specific period (usually a year). An income statement also outlines the costs and expenses associatedwith earning that revenue. Typically, the final figure of this statement shows the company’s net earnings orlosses. This tells you how much the company earned or lost over the period.

Drawing an Income Statement

To better understand how income statements are set up, it may be helpful to think of them as a set ofstairs.

We start at the top with the total amount of sales madeduring the accounting period. Then we will go down,one step at a time. At each step, we make a deductionfor costs or expenses associated with correspondingrevenue. This means that each step will bring arevenue and an expense pair, or an expense item intothe picture. At the last step, after deducting allexpenses, we will learn how much the companyearned or lost during the period. People often call this“the bottom line.” It is the company’s net earnings orloss.

Let’s take a closer look at each step of pulling together your Income Statement:

Step 1.

At the top of the income statement is the total amount of money brought in from sales of products orservices.

This is the gross revenue or sales and often referred to as the “top line”. It’s “gross” because we have notdeducted expenses from it, therefore a “gross” or unrefined number. Similar to your pay stub from yourpaycheck, which starts out listing your gross pay, then lists all your deductions and taxes down to your netpay. Likewise we start with gross revenue or sales and in each subsequent step, we will further refine it,approaching the net figure at the last step.

Step 2.

The next line lists money the company does not expect to collect on certain sales.

This could be, for instance, sales discounts or merchandise returns or bad checks. Therefore, it is adeductible item because it is non-collectable. Since it is a loss of revenue, we subtract it from sales toarrive at the company’s net revenue or “net sales.”

Step 3.

This step typically shows the costs associated with the sales also known as the “Cost of Goods Sold.”

This is the amount of money spent to produce the goods or services sold during the period. By deductingthe Cost of Goods Sold, we get “gross profit” or “gross margin.” It is “gross” because there are stilladditional expenses that need to be deducted to arrive at our last step.

Step 4.

The next step deals with Operating Expenses. It is a comparatively bigger step on the stairs, simplybecause there can be a great number of them. Operating expenses are the expenses that go towardsupporting a company’s operations for a given period. Operating expenses are different from the cost ofsales because operating expenses cannot be linked directly to the production of the products or servicesrendered.

In our example, the operating expenses are divided into Selling Expenses and General Expenses. Sellingexpenses include those expenses spent to make a sale and can include marketing costs, travel, andcommissions. General expenses can include salaries, research and development and depreciation oramortization.

Note: Depreciation or Amortization takes into account the wear-&-tear on assets such asmachinery, tools and furniture, which are used over a long term or over a number of periods. Therefore, wealso spread the cost of these assets over the periods they are used. The depreciation deducted from grossprofit in a period is determined as a fraction of the original cost of the assets. This fractional amount isusually placed in a savings or depreciation account so that it is there to be used as a replacement cost atthe end of the life of the equipment.

After all operating expenses are deducted from gross profit, we arrive at the figure of operating profitbefore interest and income tax expenses, also known as “income from operations.” In our example,Income from Operation equals Gross Profit minus Total Operating Expenses.

Step 5.

Next, we still need to account for interest income and interest expenses. Interest income is the moneycompanies make from keeping their cash in interest-bearing savings accounts or otherinvestments. Interest expense is the money companies paid in interest for money they borrow. Weadd or subtract the interest income and expense to arrive at the figure of the “Income Before Taxes.”

Step 6.

In the final step, income tax is deducted and we arrive at the bottom line or the last step of the stair: netprofit or net losses.

Here we finally know about the profit or loss of a company. Specifically, whether or not the company madeor lost money and, as in our example, whether they did better or worse than the previous year.

Note: Earnings per share on an income Statement

Some Income Statements also report earnings per share (or “EPS”). This figure is the earnings per share

of investment made in the company. The calculation of EPS tells you how much money shareholderswould receive if the company decided to distribute all of the net earnings for the period.