Income Statement Analysis: How to Read an Income Statement

A balance sheet tells you everything your business is holding on to at a particular point in time—your assets and liabilities. The balance sheet tells you where you are, while the income statement tells you how you got there. All programs require the completion of a brief online enrollment form before payment.

1. You’ll look at your revenue later when it’s time to determine your profit margin—the relationship between how much you spend versus how much you earn.
2. These costs include wages, depreciation, and interest expense among others.
3. It provides them with a summary of the performance of the company during a specific period.
4. For a company offering subscription or consulting services, operating revenue will be the fees earned for services rendered.

The Income Statement vs. the Balance Sheet

Interest expenses are the costs that a company bears for receiving financing. Typically firms receive bank loans and pay interest expenses for the amounts they owe. My Accounting Course  is a world-class educational resource developed by experts to simplify accounting, finance, & investment analysis topics, so students and professionals can learn and propel their careers.

Here’s an example of why you have to file a tax return 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.

Within an income statement, you’ll find all revenue and expense accounts for a set period. Accountants create income statements using trial balances from any two points 10 tips for creating budgets at nonprofit organizations in time. An income statement reveals a company’s financial performance over a specific period, narrating the story of the business’s operational activities.

General Expenses (aka Selling, General, and Administrative Expenses, or SG&A)

However, EBITDA can be calculated using the information from the income statement. Income statements provide a summary of the performance of a company during a specific accounting period and are useful for various stakeholders like management, investors, lenders, and creditors. With the income statement detailing the categories of revenues and expenses of a company, management is able to see how each department of a company is performing.

These two calculations are best shown on a multi-step income statement. Gross profit is calculated by subtracting cost of goods sold from net sales. Operating income is calculated by subtracting operating expenses from the gross profit.

Calculate the Cost of Goods Sold (COGS)

The income statement is an integral part of the company performance reports. While the balance sheet provides a snapshot of a company’s financials as of a particular date, the income statement reports income through a specific period, usually a quarter or a year. Next, $560.4 million in selling and operating expenses and $293.7 million in general administrative expenses were subtracted.

Non-Operating Revenue

A business’s cost to continue operating and turning a profit is known as an expense. Some of these expenses may be written off on a tax return if they meet Internal Revenue Service (IRS) guidelines. Payment is usually accounted for in the period when sales are made or services are delivered. Receipts are the cash received and are accounted for when the money is received. 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 interest-only retirement professionals. This can be facilitated by advanced accounting software, which automates and minimizes errors in entries.

In this guide we’ll use annual reports as examples, but you can prepare income statements quarterly or monthly as well. Also known as profit and loss (P&L) statements, income statements summarize all income and expenses over a given period, including the cumulative impact of revenue, gain, expense, and loss transactions. Income statements are often shared as quarterly and annual reports, showing financial trends and comparisons over time. It’s important to note that there are several different types of income statements that are created for different reasons. For example, the year-end statement that is prepared annually for stockholders and potential investors doesn’t do much good for management while they are trying to run the company throughout the year.