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The Income Statement
The Income Statement is the most basic way a company keeps score. The Income Statement, sometimes called a Profit & Loss statement or P & L, lists business revenues/sales, subtracts expenses, and shows whether the company made a profit or suffered a loss. The main value of an Income Statement, aside from its obvious value of serving as a financial scorecard, is its ability to show a detailed flow of revenues, costs, and expenses over a short- or long-term period.
Think of it this way: The Balance Sheet, which shows assets and liabilities, states the financial position of a company; the Income Statement, which shows revenues and expenses, indicates operational results. The Balance Sheet, in short, shows where you are − the Income Statement can not only show where you are but also how you got there.
The typical Income Statement is broken down into two parts: Sales and Expenses. Here's an example of a very simple Income Statement:
Keep in mind the above is a high-level view of an income statement. Income Statements can include a significant amount of detail. Instead of listing all utility expenses under the Utilities category, you could choose to break out electrical, water, phone, and natural gas separately. While all your expenses will be added together under the Utilities category, if you want to show a high level of detail on your Income Statement you certainly can. Most companies use the Income Statement as a high-level overview of company results, and use other reports to analyze expense category details.
Here's a quick breakdown of the major categories:
Keep in mind while some people refer to Net Income/Loss before taxes as the bottom line, most deduct the estimated tax liability to yield a more accurate bottom line result.
Income Statements for publicly-traded companies or for companies with more than one stockholder often include a line for Earnings per Share (EPS). Earnings per share are determined by dividing Net Income after Taxes by the total shares outstanding.
Here's an example:
While the Income Statement provides an objective snapshot of company operating results for a specific time period, it is also incredibly useful for determining changes in operating results. For example, here is the same Income Statement, but we have included results from the previous year as well:
From 2013 to 2014, sales and consulting income increased by $7,000 while Operating Expenses only increased by $1,100. The top line nearly doubled and since expenses only rose by 15%, profits quadrupled from $1,200 to $5,000. Comparing Income Statements for different time periods is an objective way to evaluate the success of marketing and sales initiatives as well as cost-cutting and productivity improvement efforts.