Income Statement Analysis: How to Read an Income Statement

Your business is making money, and you’re thinking about getting a bank loan to expand. The bank wants you to verify your business’s profitability, and asks for a copy of your traditional income statement. This income statement shows that the company brought in a total of $4.358 billion through sales, and it cost approximately $2.738 billion to achieve those sales, for a gross profit of $1.619 billion. Common size income statements include an additional column of data summarizing each line item as a percentage of your total revenue. Precise financial records require proper categorization of expenses and revenues.

Example of the traditional income statement

These are expenses incurred while operating the business and not directly related to production. They are reported separately from COGS in the income statement and include expenses for salespeople and office staff, marketing and advertising, rent for office space, and utilities. Depending on a company’s transparency, these may be listed individually under the heading SG&A. The traditional income statement is one of three key financial statements, along with the balance sheet and cash-flow statement, prepared regularly by companies, usually each quarter and year. A total of $560 million in selling and operating expenses, and $293 million in general and administrative expenses, were subtracted from that profit, leaving an operating income of $765 million. To this, additional gains were added and losses were public accounting ms subtracted, including $257 million in income tax.

1. The four key elements in an income statement are revenue, expenses, gains, and losses.
2. Total operating expenses are computed by summing all these figures ($74.1 billion + $29.5 billion + $24.4 billion + $7.6 billion) to arrive at $135.7 billion.
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4. The income statement is an integral part of the company performance reports.
5. This is why an income statement is also called a profit and loss statement (P&L).

The income statement calculates the net income of a company by subtracting commission vs salary total expenses from total income. This calculation shows investors and creditors the overall profitability of the company as well as how efficiently the company is at generating profits from total revenues. Finally, using the drivers and assumptions prepared in the previous step, forecast future values for all the line items within the income statement.

Operating profit/income

Discover our comparison of the best accounting software for nonprofits, their highlights, strengths, and weaknesses. This detailed software comparison benchmarks the top solutions for small businesses. Any interest on business loans or other debt obligations must be paid from operating profit. Here’s an example of an income statement from a fictional company for the year that ended on September 28, 2019. COGS only involves direct expenses like raw materials, labor and shipping costs. If you roast and sell coffee like Coffee Roaster Enterprises, this might include the cost of raw coffee beans, wages, and packaging.

In calculating variable costs, fixed production costs are not included in the cost of producing goods or services. With a traditional income statement, a company’s net income is calculated using both production costs and the amount of units sold by the company. A company’s net income line is therefore affected by the amount of accounts it has of specific products during the period covered by a financial report. Multi-step income statement – the multi-step statement separates expense accounts into more relevant and usable accounts based on their function.

Calculate Gross Profit

If the company is a service business, this line item can also be called Cost of Sales. How you calculate this figure will depend on whether or not you do cash or accrual accounting and how your company recognizes revenue, especially if you’re just calculating revenue for a single month. Although the income statement is typically generated by a member of the accounting department at large organizations, knowing how to compile one is beneficial to a range of professionals. Here’s an overview of the information found in an income statement, along with a step-by-step look at the process of preparing one for your organization. Please download CFI’s free income statement template to produce a year-over-year income statement with your own data. The total tax expense can consist of both current taxes and future taxes.

Format historical data input using a specific format in order to be able to differentiate between hard-coded data and calculated data. As a reminder, a common method of formatting such data is to color any hard-coded input in blue while coloring calculated data or linking data in black. The four key elements in an income statement are revenue, expenses, gains, and losses. Together, these provide the company’s net income for the accounting period. The above example is the simplest form of income statement that any standard business can generate. It is called the single-step income statement as it is based on a simple calculation that sums up revenue and gains and subtracts expenses and losses.

Income Statement: How to Read and Use It

Common size income statements make it easier to compare trends and changes in your business. We accept payments via credit card, wire transfer, Western Union, and (when available) bank loan. Some candidates may qualify for scholarships or financial aid, which will be credited against the Program Fee once eligibility is determined.