What is an income statement (2024)

“Income statements are one of the main documents we use to understand a company’s financial health,” says Fanny Cao, a CPA, CGA and Senior Advisor, Financial Products at BDC.

“They show how profitable and sustainable a company is and how efficient its management is. They’re very useful for planning and give you a lot of information on how to improve.”

What is an income statement?

An income statement shows a company’s revenues, expenses and profitability over a period of time. It is also sometimes called a profit-and-loss (P&L) statement or an earnings statement. It shows your:

  • revenue from selling products or services
  • expenses to generate the revenue and manage your business
  • net income (or profit) that remains after your expenses

An income statement is a core component of a company’s financial statements, along with these other statements:

  • balance sheet
  • cash flow statement
  • statement of retained earnings

Income statements may be prepared for different timeframes. Year-end income statements cover the company’s latest fiscal year. Companies may also prepare interim income statements on a monthly, quarterly or semi-annual basis.

Income statements usually give information for both the latest period and at least one prior period to make comparisons easier. For example, an income statement covering January 1 to December 31, 2021, would include the statements for both that year and the previous year—January 1 to December 31, 2020.

Example of an income statement

The example below shows the core components that make up an income statement. Any assumptions made in preparing the income statement are explained in the notes to the financial statements.

Income statement
XYZ Co.Year oneYear two
Revenue stream 13,500,0003,700,000
Revenue stream 22,000,0002,250,000
Total revenues 5,500,000 $500,000
Direct cost 11,870,0001,270,000
Direct cost 21,402,500 1,422,500
Total cost of sales 3,272,5002,692,500
GROSS PROFIT 2,227,5003,257,500
Gross margin (% of sales) 41% 55%
Management and office salaries and benefits669,999683,400
Advertising and marketing135,000255,000
Bad debts10,000-
Office and general75,000100,000
Professional fees35,00070,000
Repair and maintenance17,50023,500
Total SG&A expenses 1,015,099 1,204,500
OPERATING INCOME 1,212,401 2,053,000
Interest( 103,900)( 93,500)
Depreciation( 145,000)( 125,000)
Non-operating income25,000-
Non-operating expenses( 35,000)( 56,000)
EARNINGS BEFORE TAXES953,501 1,778,500
INCOME TAXES31,250 31,250
NET INCOME922,251 1,747,250

You can download a free income statement template here.

What are the main parts of an income statement?

Here are the main elements of an income statement:

1) Revenue

Also known as sales, revenue is the amount of money a company has earned by selling its products and services in the period. The revenue amount includes only money made from core activites of the business—those related to its primary operations.

For example, if a company manufactures industrial machines, its revenue would include earnings from that activity. It wouldn’t include money earned from selling a building or financial investments. These are recorded elsewhere in the income statement.

2) Cost of goods sold/cost of sales

The cost of goods sold (for manufacturing companies) or cost of sales (for retailers and wholesalers) is all the direct costs associated with making or acquiring the company’s products and/or offering its services. The amount typically includes raw materials and labour along with amortization expenses. It doesn’t include indirect costs, such as administration, marketing, sales or distribution.

3) Gross profit

Gross profit (sometimes called gross margin or contribution margin) is revenue minus cost of goods sold/cost of sales.

Gross profit is used to calculate the gross profit margin, a commonly used profitability measure. This metric is often used as an indicator of a company’s efficiency and can be benchmarked against industry peers.

4) Operating expenses

Operating expenses (also called selling, general and administrative expenses, or SG&A) are the indirect costs of running the business. These may include:

    • rent and utilities
    • marketing and advertising
    • insurance
    • office supplies
    • maintenance and repairs
    • employee benefits
    • accounting and legal fees
    • property taxes

5) Operating income

Operating income is what is left over after operating expenses are subtracted from gross profit.

6) Non-operating items

Non-operating items are gains and losses from non-core activities. Examples may include:

    • interest
    • dividends
    • one-time items such as asset sale earnings or relocation costs

7) Earnings before taxes (EBT)

Earnings before taxes (also called income before taxes) is the amount of money left after all expenses and losses are subtracted from all revenue and gains. EBT is often used as a profitability indicator because companies pay taxes at different rates depending on their location.

8) Net income

Net income (aka net profit) is the amount left over after income taxes are subtracted from EBT. It is used to calculate other useful measures, such as:

    • net profit margin, a widely used profitability indicator of that can be benchmarked against industry peers
    • EBITDA (earnings before interest, taxes, depreciation and amortization)

How do you analyze an income statement?

An income statement can be analyzed in several ways:

1) Bottom line

Look at net income to see if the company makes a profit and how the amount of profit has changed from year to year. For a better comparison, you can also calculate and compare the net profit margin. Review possible reasons for changes in your net profit and net profit margin.

“Maybe you’re making more money, but your profit margin is lower,” Cao says. “Why is that? The income statement allows you to do a lot of analysis. Maybe you have a net loss, but it’s because of a nonrecurring expense. It’s not as simple as revenue and profit. It’s also everything in between.”

2) Vertical analysis

Starting with cost of goods sold/cost of sales and working your way down, calculate each line item as a portion of revenue. This allows you to see how much various expenses affect your profitability and zero in on areas for potential improvement.

3) Time series analysis

Compare each line item with previous years both in raw dollar terms and as a portion of revenue. This allows you to understand why your profitability may have changed and think about how to improve.

4) Notes to the financial statements

Closely review the notes to the financial statements. This important section of most accountant-prepared financial statements discloses assumptions made in preparing the income statement and other information key to interpreting and analyzing the numbers.

“The notes are really integral to understanding the data correctly,” Cao says. “They reflect the quality of the statement.”

What are the uses of an income statement?

Income statements are a key document for managing and building your business and working with bankers, investors and other partners.

  • Income statements are important for strategic planning, budgeting and financial forecasts. You can use interim and annual income statements to see how your business is performing through the year and at year-end, quickly identify problem areas and compare finances with targets, budgets and projections.
  • Income statements are used by lenders, investors and other partners along with your financial statements to understand the business and its health.
  • Income statements are used to assess annual tax filings.

What is the difference between an income statement and a profit-and-loss statement?

The income statement and a profit-and-loss statement are the same thing.

What is the difference between an income statement and a balance sheet?

A balance sheet shows what a business owns and how much it owes at a specific point in time. An income statement shows what a company earned and spent over a period of time.

What is a statement of comprehensive income?

In addition to an income statement, some businesses also prepare a statement of comprehensive income. This reports revenues and expenses that haven’t yet been realized. These could include unrealized gains or losses from:

  • financial investments
  • foreign currency adjustments
  • pension liabilities

Learn more by downloading our free guide for entrepreneurs Understand Your Financial Statements: A Financial Management Guide for Entrepreneurs.

What is an income statement (2024)


What does an income statement answer? ›

An income statement is a financial statement that shows you the company's income and expenditures. It also shows whether a company is making profit or loss for a given period.

What 3 things does an income statement show? ›

An income statement shows a company's revenues, expenses and profitability over a period of time. It is also sometimes called a profit-and-loss (P&L) statement or an earnings statement.

What is needed on an income statement? ›

The income statement presents revenue, expenses, and net income. The components of the income statement include: revenue; cost of sales; sales, general, and administrative expenses; other operating expenses; non-operating income and expenses; gains and losses; non-recurring items; net income; and EPS.

What is the most important part of an income statement? ›

Revenues—The Top Line

Revenue represents the value of the goods and/or services delivered to customers over the reporting period. Revenues constitute one of the most important lines of the income statement.

What is the basic income statement? ›

The basic income statement shows how much revenue a company earned (or lost) over a specific period (usually for a year or some portion of a year). An income statement also shows the costs and expenses associated with earning that revenue. Another term for an income statement is a profit and loss statement.

How to solve an income statement? ›

The basic formula for an income statement is Revenues – Expenses = Net Income. This simple equation shows whether the company is profitable. If revenues are greater than expenses, the business is profitable.

What is the income statement format? ›

The income statement can be presented in a “one-step” or “two-step” format. In a “one-step” format, revenues and gains are grouped together, and expenses and losses are grouped together. These amounts are then totaled to show net income or loss.

How to analyze an income statement? ›

Basic analysis of the income statement usually involves the calculation of gross profit margin, operating profit margin, and net profit margin, which each divide profit by revenue. Profit margin helps to show where company costs are low or high at different points of the operations.

What is classified as income statement? ›

A classified income statement, also known as a multi-step income statement, is a financial statement that presents a company's revenues, expenses, and net income in a detailed and organized format, separating items into different categories.

What data is needed for an income statement? ›

An income statement is one of four key statements used to understand a business's financial position. It looks at total revenue, expenses, profits and losses (which is why it's also called a profit and loss or PL statement). Essentially, these statements reveal what's going on between business balance sheets.

What is in an income statement template? ›

A profit and loss (or income) statement lists your sales and expenses. It tells you how much profit you're making, or how much you're losing. You usually complete a profit and loss statement every month, quarter or year.

What is the single step income statement? ›

A single-step income statement is a summary of a business's profitability that uses one calculation to arrive at net income before taxes—hence the single step. It groups all revenue together regardless of the source and does the same for expenses. It then subtracts expenses from revenue to determine net income.

What is the main part of income statement? ›

What Are the Four Key Elements of an Income Statement? (1) Revenue, (2) expenses, (3) gains, and (4) losses.

What two items does an income statement measure? ›

The Income Statement is one of a company's core financial statements that shows their profit and loss over a period of time. The profit or loss is determined by taking all revenues and subtracting all expenses from both operating and non-operating activities.

What does a good income statement look like? ›

Your income statement follows a linear path, from top line to bottom line. Think of the top line as a “rough draft” of the money you've made—your total revenue, before taking into account any expenses—and your bottom line as a “final draft”—the profit you earned after taking account of all expenses.

What does the income statement Summarise? ›

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.

What does an income statement represent quizlet? ›

Income Statement: An income statement represents a firm's operating results over a period of time (a fiscal year or quarter). It summarizes a business's profitability (revenue minus expenses) within a time period.

What is the purpose of the financial statements? ›

Financial statements provide a snapshot of a corporation's financial health, giving insight into its performance, operations, and cash flow. Financial statements are essential since they provide information about a company's revenue, expenses, profitability, and debt.

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