What is an Income Statement
Investopedia defines an income statement
“An income statement is one of the three important financial statements used for reporting a company’s financial performance over a specific accounting period, with the other two key statements being the balance sheet and the statement of cash flows”.Investopedia
An income statement is a financial statement that reveals how lucrative your business was during a specific reporting period. It displays your revenue after deducting your costs and losses.
Income Statement Components
The income statement may range slightly amongst businesses since expenditure and revenues may vary depending on the sort of operations or business executed. Nevertheless, there are a few basic items that may be seen on any income statement.
This is the business’s revenue from sales or services, which is seen at the top of the statement. This value will be the total of the expenses connected with producing the items sold or supplying the services. Some businesses have many income streams that contribute to a total revenue section.
2. Cost of Goods Sold (COGS)
This is a revenue-generating category that comprises the direct expenses connected with selling things. If the company provides a service, this category is often known as Cost of Sales. Labor, components, materials, and distribution of additional expenditures like depreciation are examples of direct costs.
3. Gross Profit
Gross profit is derived by deducting the COGS (or the cost of sales) from the sales revenue.
4. Expenses for Marketing, Advertising, and Promotion
Several businesses incur expenditures as a result of selling goods/services. Marketing, advertising, and promotion expenditures are sometimes lumped together since they are all connected to selling.
5. Expenses for General and Administrative (G&A) Purposes
Selling, General & Administrative (SG&A) expenses comprise all additional indirect costs connected with running a business. Salaries and wages, rent and office expenditures, insurance, as well as other operational expenditures, are all included.
EBITDA is an acronym that stands for Earnings before Interest, Tax, Depreciation, and Amortization. It is not shown on all income statements. It is generated by deducting SG&A expenditures from gross profit except for amortization and depreciation.
7. Expenses for Depreciation and Amortization
Accountants create depreciation and amortization to stretch out the cost of capital assets such as Property, Plant, and Equipment (PP&E).
8. Operating Income/EBIT
EBIT is a financial acronym that refers to Earnings Before Interest and Taxes. This is the amount of money gained through normal business activities. That is, it is profit before non-operating income, non-operating costs, interest, and taxes are deducted from revenue.
Businesses typically divide interest costs and interest income as different components on their income statements. This is done to rectify the disparity between EBIT and EBT. The debt plan determines interest costs.
10. EBT/Pre-Tax Income
Earnings Before Tax (EBT), often known as pre-tax income, is calculated by deducting interest costs from Operating Income. This is the last subtotal before calculating net income.
11. Income Taxes
These are the taxes levied on pre-tax income. The overall tax expenditure might include both current and projected taxes.
12. Net Income
Subtracting income taxes from pre-tax income generates net income. This is the sum that goes into working capital on the balance sheet after any dividends are subtracted.
13. Additional Expenses
Other expenses that are specific to a business’s industry are common. this may include technology, stock-based compensation (SBC), gains/losses on investment sales, research and development, and many others.
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