What Is an Income Statement?

What Is an Income Statement?

Let me explain what an income statement is—it's a financial report that you use to track a company's revenue, expenses, gains, and losses over a set period. You might also hear it called a profit and loss statement or statement of revenue and expense. This document gives you valuable insights into how the company operates, how efficient its management is, which sectors are underperforming, and how it stacks up against others in the industry.

Remember, the income statement is one of three key financial statements for reporting performance, along with the balance sheet and cash flow statement.

Key Takeaways

You should know that an income statement shows revenue, expenses, gains, and losses, starting from revenue and ending with net income. It works alongside other statements like the balance sheet and cash flow. This report helps you understand operations, efficiency, management, and sector performance. You can present it in single-step or multi-step formats.

Understanding the Income Statement

The income statement is a core part of company performance reports. While the balance sheet gives you a snapshot at a specific date, the income statement covers income over a period, like a quarter or year. It shows how net revenue turns into net earnings, reporting revenue, expenses, gains, and losses. It starts with sales details and works down to net income and earnings per share. Note that it doesn't separate cash from non-cash items.

You'll see the period covered right in the heading, such as 'for the year ended January 31, 2024' or 'three months ended March 31, 2024'. If it's a publicly traded company, they must submit these to the SEC.

Parts of an Income Statement

Formats can vary based on regulations, business scope, and activities, but certain elements are always there. Operating revenue comes from primary activities, like selling products if you're a manufacturer or retailer. For service businesses, it's fees from those services.

Non-operating revenue is from secondary activities, such as interest on bank capital, renting property, royalty payments from partnerships, or ad income. Gains are net money from things like selling long-term assets, not to be confused with receipts—revenue is recorded when sales happen, receipts when cash comes in.

Expenses include primary-activity ones like cost of goods sold, SG&A, depreciation, and R&D—think wages, commissions, utilities, transportation. Secondary-activity expenses cover non-core items like interest on loans. Losses as expenses include costs from selling assets at a loss, unusual costs, or lawsuits.

Income Statement Structure

Mathematically, net income is revenue plus gains minus expenses plus losses. Take a hypothetical sports merchandise business with $30,800 in revenue from goods and services, $10,650 in costs, a $2,000 gain from selling a van, and an $800 loss from a dispute—that leaves $21,350 net income.

Single-Step vs. Multiple-Step Income Statement

The simple version is single-step: sum revenue and gains, subtract expenses and losses. But for complex companies with global operations, mergers, and diverse segments, you use multi-step, which breaks out profitability at gross, operating, pretax, and after-tax levels. This shows changes, like high gross profit but low operating income due to expenses. Listed companies use multi-step for more details.

Income Statement Example

Look at Microsoft's June 2024 income statement. Revenue was $245.1 billion, minus $74.1 billion cost of revenue for $171.0 billion gross profit—about 30% of sales went to costs. Operating expenses totaled $135.7 billion, including R&D, sales, marketing, and admin, leading to $109.4 billion operating income. After other income, expenses, and taxes, net income was $88.1 billion, with EPS at $11.86 based on 7.433 billion shares.

Uses of Income Statements

You can use income statements externally for investors and creditors, or internally for management. Investors get details on profitability and activities, helping compare businesses and understand what drives profits. Management sees core performance from primary revenue and expenses, and how well they're using non-core opportunities—like high interest income might mean underused cash, while rental income shows smart asset use. This informs decisions on expansion, sales pushes, or shutting down lines.

Competitors might analyze it for insights on spending, like R&D. Creditors focus on cash flow trends, checking if cost reductions improved profits or if expenses were controlled without hurting profitability.

What Are the Four Key Elements of an Income Statement?

The four key elements are revenue, gains, expenses, and losses, which together give net income for the period.

What Is the Difference Between Operating Revenue and Non-Operating Revenue?

Operating revenue comes from core activities like product sales, while non-operating is from side sources like interest or rentals.

What Insights Should You Look for in an Income Statement?

Look at income and expense components to see what makes the company profitable. Competitors use them for comparisons, and analysts track year-on-year changes.

The Bottom Line

An income statement lays out revenue, expenses, gains, and losses for a period, giving insights into profitability and EPS. You, as an investor, competitor, or executive, can use it to evaluate operations, management efficiency, profit-eroding areas, and industry performance.