Income Statement Analysis: How to Read an Income Statement

accounts on income statement

The balance sheet tells you where you are, while the income statement tells you how you got there. The bottom line of the income statement, calculated as Pre-Tax Income minus Taxes. At the bottom of the income statement, it’s clear the business realized a net income of $483.2 million during the reporting period. Your reporting period is the specific timeframe the income statement covers. First, input historical data for any available time periods into the income statement template in Excel. Format historical data input using a specific format in order to be able to differentiate between hard-coded data and calculated data.

To prepare an income statement, small businesses must analyze and report their revenues, operating expenses, and the resulting gross profit or losses for a specific reporting period. The income statement, also called a profit and loss statement, is one of the accounts on income statement major financial statements issued by businesses, along with the balance sheet and cash flow statement. A projected income statement is a financial document that shows a company’s expected revenue and expenses for a future period of time by making estimates.

Operating Expenses

The statements are open to interpretation, and as a result, investors often draw vastly different conclusions about a company’s financial performance. Primary expenses are incurred during the process of earning revenue from the primary activity of the business. Expenses include the cost of goods sold (COGS), selling, general and administrative expenses (SG&A), depreciation or amortization, and research and development (R&D).

Cost of goods sold equal to the beginning of inventories plus purchase during the period less ending inventories. Costs of goods should be increasing or decreasing consistently with the revenues fluctuation. If the trend goes in a different direction, either costs or revenues are not correctly recorded or reported. Income statement may be presented using the single-step or multi-step approach. A multi-step income statement shows more details and is more commonly used.

Statement of Retained Earnings vs Income Statement Differences and Similarities

If you prepare the income statement for a particular business line or segment, you should limit revenue to products or services that fall under that umbrella. Financial performance, or results of operations, is primarily measured by computing the net income. Below is a video explanation of how the income statement works, the various items that make it up, and why it matters so much to investors and company management teams. It is common for companies to split out interest expense and interest income as a separate line item in the income statement.

One can infer, for example, whether a company’s efforts at reducing the cost of sales helped it improve profits over time, or whether management kept tabs on operating expenses without compromising on profitability. An income statement is one of the three important financial statements used for reporting a company’s financial performance over a specific accounting period. The other two key statements are the balance sheet and the cash flow statement.

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Badr AlAhmed

Badr AlAhmed Trading Est.