Understanding an Income Statement

An income statement is simply one of the business’s financial documents and details the company’s profits and losses over a given period. It is a summary of what the company has done with its finances and how well they are doing financially. Every business that makes a profit has an income statement. And, virtually every business can expect to enter into a period of growth, at some point.

This statement of income shows how operating revenues changed during a specific reporting period compared to the operating expenses. It is often presented together with the statement of operating expenses, which sums up all operating expenses, both fixed and variable. Sometimes these are presented separately. Most businesses will report their income statement on a quarterly basis. However, occasionally there will be a special report that breaks down quarterly results separately for individual companies.

Income statements do not include information on inventory balances, stock repurchases or dividends paid. Generally speaking, the information reported in these statements is considered less important than the other financial information that would be presented if the information was available. The statement merely presents the information necessary in computing the income statement’s revenue and expense figures. These reports also provide a basis for the preparation of the annual budget and providing a statement of cash flow for the year.

In addition to the income statement, another financial document that must be included is the balance sheet. It is the summary of a company’s financial performance as of a certain date, referred to as the balance sheet. It provides financial data necessary to calculate the net worth of a company. For businesses that trade on foreign exchanges, it must be prepared in accordance with the laws of that jurisdiction. While most organizations prepare their balance sheet on a monthly basis, some do so more frequently.

Both the income statement and the balance sheet provide financial information needed by investors and management to determine the fair market value of their stock and other equity instruments. Fair market value is a single term that refers to a price that would be equal to the total current value of all shares of the issued capital stock plus the dividends received for the last two years. Because dividends are usually paid in kind, they reduce the income effecting the company. The inclusion of other financial reporting periods creates a historical account of how the corporation has traded and adds risk to the income statement. It can also help to determine whether the income statement is providing an accurate depiction of what the company has generated in each reporting period.

The income statement and the balance sheet do not always coincide, and in cases where the income statement does not include certain items, the headings and subheadings in the income statement may be used to interpret the information. For example, when talking about stock-based compensation, the reporting period for that item might only be one year. The language should be updated to reflect the current year if that is required.

A company’s operating expenses are the costs required for doing business. The items recorded under this category include rent, overhead cost including utilities and payroll, cost of good management, marketing or advertising expenditures and transportation expenses including gasoline and vehicle maintenance. Subtract the total of these expenses from revenues to get the amount of income from revenue. All non-operating expenses are included in the gross profit statement along with the other expenses required to record the gross profit.

The statement should also indicate whether or not the gross profit is subject to tax. In most cases, income statement should be prepared based on the last three months of income. Revenues that occur during the first or second month of a quarter are not reflected in the first or second months of a calendar quarter due to the short time frame involved. Income statements are prepared for taxation purposes only and should not be interpreted as indicating the amount of income or loss for a specific period of time.