An income statement is a financial statement that shows a company’s revenue, expenses, and net income over a specific period of time.
Revenue is the amount of money a company earns from the sale of its products or services, while expenses are the costs incurred in the process of generating revenue.
The income statement typically begins with revenue at the top and subtracts various expenses, such as the cost of goods sold, salaries and wages, rent, and marketing expenses, to arrive at the net income or profit for the period.
The purpose of the income statement is to provide investors and other stakeholders with an overview of the company’s financial performance over the period covered by the statement. This information can be used to assess the company’s profitability, growth prospects, and overall financial health.
In addition to the basic income statement, companies may also provide additional information such as earnings per share (EPS) and gross profit margin, which can provide further insights into the company’s financial performance. The income statement is one of the three primary financial statements used by investors and analysts to evaluate a company, along with the balance sheet and cash flow statement.
Some examples of how income statements work in practice:
- A small business owner might create an income statement to track the financial performance of their company. They could list their revenue from sales of products or services, and subtract expenses such as rent, salaries, and supplies to determine the net income for the month or quarter.
- An investor might use the income statement of a publicly traded company to evaluate their investment. For example, if a company’s revenue has been growing steadily over the past several quarters and their expenses have remained relatively stable, it may indicate a strong financial performance and potential for future growth.
- A nonprofit organization might create an income statement to track their revenue from donations and grants, and their expenses such as salaries and program costs. This can help them to ensure that they are operating within their budget and meeting their financial goals.
- A publicly traded company might issue an earnings report that includes an income statement, as well as additional financial metrics such as earnings per share and gross profit margin. This information can be used by investors to compare the company’s financial performance to other companies in the same industry.
- A bank might use an income statement to evaluate a loan application from a small business owner. By reviewing the company’s revenue and expenses, the bank can determine whether the business is likely to be able to repay the loan.