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Basic Financial Statement Income Statement

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18 views4 pages

Basic Financial Statement Income Statement

Uploaded by

ngarcia111504
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Basic Financial Statements: Income Statement**

The **income statement**, also known as the profit and loss (P&L) statement or statement of earnings,
reports a company's financial performance over a specific period of time. It summarizes the revenues
earned and the expenses incurred to arrive at the net income (profit) or net loss for the period. The
income statement provides valuable insights into a company's profitability and its ability to generate
profits. It is a crucial financial statement for investors, creditors, and other stakeholders to assess a
company's success and make informed decisions.

The purpose of the income statement is to present a clear picture of a company's revenues and
expenses and the resulting profit or loss during a specific reporting period, such as a month, a quarter,
or a year. It helps users understand how effectively a company has generated revenues and managed its
expenses. By comparing income statements from different periods, trends in a company's profitability
can be identified.

The key components of an income statement are:

* Revenues: These are inflows or other enhancements of assets or settlements of liabilities from a
company's ongoing major or central operations. Revenues represent the amounts earned by selling
goods or providing services. Examples include sales revenue, service revenue, interest revenue, and rent
revenue.

* Expenses: These are outflows or other consumption of assets or incurrences of liabilities from a
company's ongoing major or central operations. Expenses represent the costs incurred in generating
revenue. Examples include cost of goods sold, salaries and wages expense, rent expense, utilities
expense, depreciation expense, and interest expense.

* Net Income (or Net Loss): This is the "bottom line" of the income statement and is calculated by
subtracting total expenses from total revenues. If total revenues exceed total expenses, the result is a
net income (profit). If total expenses exceed total revenues, the result is a net loss.

There are different formats of the income statement, primarily the single-step and the multi-step
formats.

* Single-Step Income Statement: This format is simpler and groups all revenues together and all
expenses together. Net income is calculated by subtracting total expenses from total revenues in one
step. This format is often used by service companies or smaller businesses.

ABC Company

Income Statement

For the Month Ended May 31, 2025


Revenues:

Service Revenue $5,000

Interest Revenue $100

Total Revenues $5,100

Expenses:

Salaries Expense $2,000

Rent Expense $500

Utilities Expense $300

Depreciation Expense $200

Total Expenses $3,000

Net Income $2,100

* Multi-Step Income Statement: This format provides a more detailed breakdown of revenues and
expenses, often separating operating items from non-operating items. It calculates intermediate
subtotals such as gross profit and operating income, providing a more insightful view of a company's
profitability. The multi-step format is commonly used by merchandising and manufacturing companies.

ABC Company

Income Statement

For the Month Ended May 31, 2025

Revenues:

Sales Revenue $10,000

Cost of Goods Sold $4,000

Gross Profit $6,000


Operating Expenses:

Salaries Expense $2,000

Rent Expense $500

Utilities Expense $300

Depreciation Expense $200

Total Operating Expenses $3,000

Operating Income $3,000

Other Revenues and Expenses:

Interest Revenue $100

Interest Expense $50

Gain on Sale of Asset $200

Loss on Disposal of Asset $100

Net Other Income (Expense) $150

Income Before Income Taxes $3,150

Income Tax Expense $400

Net Income $2,750

The multi-step income statement provides more information for analysis. Gross profit (Sales Revenue -
Cost of Goods Sold) indicates the profitability of a company's core operations before considering
operating expenses. Operating income (Gross Profit - Operating Expenses) reflects the profitability from
normal business operations. Non-operating items, such as interest revenue and expense, and gains or
losses on the sale of assets, are reported separately. Finally, income tax expense is deducted to arrive at
net income.

Understanding the income statement is crucial for assessing a company's financial health and
performance. It helps in evaluating profitability, efficiency in managing expenses, and the overall success
of the business operations over a period of time.

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