Income Statement Analysis: How to Read an Income Statement

For most businesses, the majority of its revenue is derived from sales. Cash flow from investing includes cash received from or used for investing activities, such as buying stock in other companies or purchasing additional property or equipment. Cash flow from financing activities includes cash received from borrowing money or issuing stock, and cash spent to repay loans. Income statements give a snapshot view of business performance – create a monthly, quarterly or annual statement, which you can analyze and compare to performance over the same period in previous years. Customize and plug in your business numbers, to make analyzing your company performance easy. A company’s assets have to equal, or “balance,” the sum of its liabilities and shareholders’ equity.

Add up all the cost of goods sold line items on your trial balance report and list the total cost of goods sold on the statement directly below the revenue line item. To create an income statement for your business, you’ll need to print out a standard trial balance report. You can quickly generate the trial balance through your cloud-based accounting software. Trial balance reports are internal documents that list the end balance of each account in the general ledger for a specific reporting period. An income statement is not a balance sheet or a cash flow statement.

Statement of financial position (balance sheet)

However, multi-step income statements can benefit small businesses that have a large variety of revenue streams. Below are several ways multi-step income statements can benefit your small business. If you have more than a few income streams or a complicated financial landscape, we suggest using multi-step income statements to get a better view of your profits and losses. In Why It Matters, we pointed out that accounting information from the financial statements can be useful to business owners. The financial statements provide feedback to the owners regarding the financial performance and financial position of the business, helping the owners to make decisions about the business.

By understanding the income and expense components of the statement, an investor can appreciate what makes a company profitable. However, real-world companies often operate on a global scale, have diversified business segments offering law firm bookkeeping a mix of products and services, and frequently get involved in mergers, acquisitions, and strategic partnerships. A gain on the sale of fixed assets is shown in the statement of profit and loss as non-operating income.

Finalize your income statement

Your revenue includes all the money earned for your services during the reporting period, even if you haven’t yet received all the payments. Add up all the revenue line items from your trial balance report and enter the total amount in the revenue line item of your P&L. Your balance sheet will be separated into two main sections, cash and cash equivalent assets on the one side, and liabilities and equity on the other. Documenting the financial details of your business will give you a thorough understanding of available cash flows so that you can make informed decisions about the viable future of your business.

• Using an income statement, you can track the cost of sales during a certain period of time to determine if your expenses and prices are too high or too low.
• Accounts such as salaries, utilities and depreciation expenses are all shown in this section.
• You’ll sometimes see income statements called a profit and loss statement (P&L), statement of operations, or statement of earnings.
• The owner, Chuck, heard that you are studying accounting and could really use the help, because he spends most of his time developing new popcorn flavors.

Sometimes balance sheets show assets at the top, followed by liabilities, with shareholders’ equity at the bottom. Financial projections help you make more informed decisions about your business. FreshBooks offers a wide variety of accounting services that save you time and money when creating financial statements. Learn more about FreshBooks accounting tools and give them a try for free. Your cost of goods sold includes the direct labor, materials, and overhead operating expenses you’ve incurred to provide your goods or services.

Notes to the financial statements

For accrual accounting, you need to credit one account and debit another. If an account is increased by one account, it is decreased by the other. PwC refers to the US member firm or one of its subsidiaries or affiliates, and may sometimes refer to the PwC network.

These periodic statements are aggregated into total values for quarterly and annual results. An income statement provides valuable insights into various aspects of a business. It includes readings on a company’s operations, the efficiency of its management, the possible leaky areas that may be eroding profits, and whether the company is performing in line with industry peers. Competitors also may use them to gain insights about the success parameters of a company and focus areas such as lifting R&D spending. The goal of going through the process shown in Figure 1.7 “Income Statement Schedules for Custom Furniture Company” is to arrive at a cost of goods sold amount, which is presented on the income statement. Custom Furniture Company’s income statement for the month ended May 31 is shown in Figure 1.8 “Income Statement for Custom Furniture Company”.

Receipts are the cash received and are accounted for when the money is received. Using the cost flow equation, you can see how failing to record the $9,000,000 loss would understate cost of goods sold. If you have buildings or equipment that you rent out on the side, you need to make a Rent Revenue account. Like revenue, payment may or may not have been made.Examples of expenses include salaries, expenses, utility expenses, interest expense etc. When you subtract the returns and allowances from the gross revenues, you arrive at the company’s net revenues.

• Here is an example of a journal entry you would create when you make a sale (using accrual accounting).
• Rite Aid Corporation operates 3,400 drug stores in the United States.
• To calculate income tax, multiply your applicable state tax rate by your pre-tax income figure.
• When used in conjunction with the other financial statements, income statements are a great way to get a clear view of your cash flow.
• The income statement should be used in tandem with the balance sheet and statement of cash flows for a clear view of business performance.

These two calculations are best shown on a multi-step income statement. Gross profit is calculated by subtracting cost of goods sold from net sales. Operating income is calculated by subtracting operating expenses from the gross profit. We should note that we are oversimplifying some of the things in this example.