Income Statement

Income StatementThe income statement is another one of main financial statements that can be produced by a business. The income statement shows how much a company has earned and how much the company has spent over a period of time.

This widely used statement can go by names such as the profit and loss statement (P&L), earnings statement, and the statement of operations.

The income statement is unique because it describes what has happened over a period of time. It takes into account the revenues and the expenses over a year, or a part of the year.

At the end of the income statement we are able to see the net income or net loss that a company is left with. This is the “bottom line” that many are so concerned about.

To better understand the income statement, we will cover.

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What is in the Income Statement?

As mentioned in the opening paragraph, the income statement shows how much a company has earned and how much the company has spent. The earnings are called revenues and the expenditures are called expenses. There are a few other items that appear on the income statement and we cover them below.

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Revenues

These are increases in a company resource gained through the sale of goods, the sale of services, or any other operating activity. A few revenue accounts are:

  • Dividend Revenue
  • Fee Revenue
  • Interest Revenue
  • Rent Revenue
  • Sales Revenue

Revenues accounts can be linked with contra-revenue accounts that act to reduce the total revenue balance.  An example of that would be the sales discounts account that would be linked to the sales revenue account.

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Expenses

Expenses are the costs that are generated by operating the business and the costs associated with gaining revenues. Examples of expenses accounts are:

  • Cost of Goods Sold (COGS)
  • Depreciation Expense
  • Insurance Expense
  • Rent Expense
  • Salaries Expense
  • Utilities Expense

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Gains and Losses

The income statement also present the money made and lost from transactions that are outside of the everyday operations of the firm. These are material to the firm and must be represented, but since they are not a part of normal operations they must be separated.

  • Gains and/orLosses can appear as the following examples:
  • Gain on Sale of Land
  • Loss on Sale of Operating Equipment
  • Loss on Lawsuit

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Net Income (Loss)

This is the bottom line on the income statement. The net income (loss) shows exactly how profitable or unprofitable the firm has been over the period. Essentially, the net income (loss) is derived by subtracting the revenue from the expenses. For many people that read the income statement, this is the most important part.

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Earnings per Share

The Earnings per Share (EPS) is also reported on the income statement. This ratio tells investors how much money is associated with each share of common stock.

To put it in another way, the EPS shows how much a shareholder would receive per share if the company distributed all of its earnings for the period.

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Sample Income Statement

A sample income statement for Company ABC is displayed below. Take note that the income statement reads, “For the year ended..” This reinforces the idea that the income statement covers a period of time.

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