Income Statement

Income Statement happens to be one of the major financial statements a company publishes. The statement is also referred to as the Profit and Loss Statement which contains the information on the method by which the revenue is transformed into the net income.

In the corporate structure, the income statement is important since it contains a synopsis of the company’s expenses and revenues quarterly or annually for a financial year. This statement has a lot of significance for the investors since they go through the report to find out whether investing in this company would be profitable for them or not. Therefore before investing in this company the investors take a look at this report prepared by the company.

Income statement is known by various other names around the world and within the fraternity of the accountants. The most commonly used term is the ‘statement of income’. Apart from this term coinages like ‘statement of earnings’, ‘statement of operations’ are also used. The P&L statement is also a commonly used term.

The objective of preparing an income statement is to project the company’s profit or loss during the financial year.
Income Statement – Utility:
For an efficient investor the income statement of a company is worth a watch. The income statement gives an insight into the company’s management team, how well the company funds are managed, the taxes paid and expenses are handled. The investors also receive an opportunity to calculate the financial ratio to find out how much the company garners as profit and how much dividend the shareholders receive from the company. It helps the investors to determine the performance of the company and it also helps them to forecast about the future performance of the company. They can also analyze the risk involved in receiving future cash flows.
Forms of Income Statements:
The income statement exists in two forms. They are:

  1. Single-Step Income Statement: In this form of statement only two groups exist. They are revenue and expenses. The expenses borne by the company are deducted from the revenue garnered by it to get the net income.
  2. Multi-Step Income Statement: In the multi-step format a number of aspects are taken care of. They are, net sales which is the basic worth of the company’s transactions that is revenues and sales. Followed by cost of sales which is the total cost of production along with the wages of the labors. The gross profit which is the term given to denote the difference between the net sales and cost of sales. Others are operating income, selling general and administrative expenses, pretax income, interest income, net income, income tax, special items or extraordinary expenses and comprehensive income.

Sections of the Income Statement:
The income statement consists of two parts. They are:
Operating section
Non-operating section
The operating section deals with the expenses and revenues of the company and is most important to the investors since this is the result of the transaction of the company. From this section the investors can analyze whether their investment in the company would fetch them profit.

The non-operating section discloses the information on activities which does not deal with the regular transaction of the company.

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Last Updated on : 26th June 2013