This key financial statement shows your profitability and is an important tool for managing and building your business Show
Share An income statement is a key financial document for your business. It shows what your company earns, what it spends and if it’s making a profit over a specific period of time. It is also an important tool for managing your business and planning your strategy. The income statement is used by lenders, investors and other partners to gauge your financial performance and make decisions that can affect your company’s future.  Taking control of your cash flowLearn how to measure your business's cash conversion cycle. Download our guide The Taking Control of Your Cash Flow guide will be sent to you by email.
Email address First name Last name Business phone Job role Company name Industry Annual sales Established in I also accept that BDC send me, via email, information about business advice, solutions and events. You can withdraw your consent at any time. “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.” Income statements show how profitable and sustainable a company is and how efficient its management is. Fanny Cao CPA, CGA, Senior Advisor, Financial Products, BDC 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:
An income statement is a core component of a company’s financial statements, along with these other statements:
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. The income statement allows you to do a lot of analysis. It’s not as simple as revenue and profit. It’s also everything in between. Example of an income statementThe 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 statementXYZ Co.Year oneYear twoREVENUES Revenue stream 13,500,000 3,700,000 Revenue stream 22,000,000 2,250,000 Total revenues 5,500,000 $500,000COST OF SALES Direct cost 11,870,000 1,270,000 Direct cost 21,402,500 1,422,500 Total cost of sales 3,272,500 2,692,500GROSS PROFIT 2,227,500 3,257,500Gross margin (% of sales) 41% 55%SELLING, GENERAL & ADMINISTRATIVE EXPENSES Management and office salaries and benefits669,999 683,400 Advertising and marketing135,000 255,000 Bad debts10,000 - Office and general75,000 100,000 Occupancy45,000 45,000 Professional fees35,000 70,000 Insurance22,000 22,000 Repair and maintenance17,500 23,500 Utilities5,600 5,600 Total SG&A expenses 1,015,099 1,204,500OPERATING INCOME 1,212,401 2,053,000INTEREST AND DEPRECIATION Interest ( 103,900) ( 93,500)Depreciation ( 145,000) ( 125,000)NON-OPERATING ITEMS Non-operating income 25,000 -Non-operating expenses ( 35,000) ( 56,000)EARNINGS BEFORE TAXES 953,501 1,778,500INCOME TAXES 31,250 31,250NET INCOME 922,251 1,747,250You 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) RevenueAlso 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 salesThe 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 profitGross 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 expensesOperating expenses (also called selling, general and administrative expenses, or SG&A) are the indirect costs of running the business. These may include:
5) Operating incomeOperating income is what is left over after operating expenses are subtracted from gross profit. 6) Non-operating itemsNon-operating items are gains and losses from non-core activities. Examples may include:
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 incomeNet 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:
How do you analyze an income statement?An income statement can be analyzed in several ways: 1) Bottom lineLook 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 analysisStarting 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 analysisCompare 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 statementsClosely 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.
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:
Learn more by downloading our free guide for entrepreneurs Understand Your Financial Statements: A Financial Management Guide for Entrepreneurs. What are transitory items on the income statement?Transitory Items. a one time item that is a gain or loss or expense on the income statement. nonrecurring in nature therefore not considered part of the company's ongoing business operations.
Which of the following is considered to be a limitation of income statement?The limitations of income statement are as follows: Income is reported based on the accounting rules and does not represent the actual cash changing hands. There will be variation in the way inventory is calculated (either FIFO or LIFO) and therefore income statements cannot be compared.
Which of the following item can be presented in income statement?The statement displays the company's revenue, costs, gross profit, selling and administrative expenses, other expenses and income, taxes paid, and net profit in a coherent and logical manner.
Which of the following is considered an expense on the income statement?Answer and Explanation: D) Cost of goods sold is considered an expense on the income statement.
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Which of the following income statement items is considered to be transitory?
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