What is an Income Statement?
Income Statement Overview
The Income Statement is one of the 3 most important financial statements used in reporting a company's financial performance (the other 2 financial statements are the Balance Sheet and the Cash Flow Statement). Also known as the profit and loss statement, the Income Statement primarily focuses on the company’s revenues and expenses during a particular period of time.
The Income Statement focuses on 4 financial items: Revenue, Expenses, Gains, and Losses. It starts with sales, and ends with net income. Overall, the Income Statement gives a snapshot of how revenue transforms into earnings (profit and/or loss).
Details on Income Statements
Revenues and Gains
Operating and Non-Operating Revenue
Revenue realized through primary business activities is typically referred to as operating revenue. For a company selling a product, the revenue from primary activities refers to revenue achieved from the sale of the product.
Revenues realized through secondary business activities are typically referred to as non-operating recurring revenues. These revenues are from earnings which are outside of the sale of goods and services and could include income from interest, rental income, or income from partnerships.
Gains
Also called “Other Income”, gains illustrate the money made from other activities, such as the sale of long-term assets. These include the net income realized from one-time non-business activities, like a company selling old vehicles, land, or a subsidiary company.
Expenses and Losses
Primary Activity Expenses
The costs for a business to operate and be profitable are known as expenses. Primary expenses are incurred while earning the normal operating revenue linked to the primary activity of the business. They include the cost of goods sold (COGS), sales, administrative expenses, depreciation, and research and development. Typical items that make up the list are employee salaries, sales commissions, and expenses for utilities such as electricity.
Secondary Activity Expenses
All expenses linked to non-core business activities, like interest paid on a business loan. While, primary revenue and expenses offer a view into how the company’s main business is performing, secondary revenue and expenses offer a view into the company’s strength in managing non-core business activities.
Example of an Income Statement
The Income Statement is calculated based on the following formula:
Net Income = (Revenue + Gains) – (Expenses + Losses)
Below is a sample Income Statement for XYZ Company
Income Statement Conclusion
At Verdia, we use the Income Statement as one of the ways we assign value to the companies we choose to invest in. The income statement provides valuable insights into a business, highlighting a company’s operations, management, profits, and how they compare to their competition.
Happy Trading, Verdia
Subscribe Today
Jumpstart your personal investing. Join InvestPro™ and get exclusive access to our simple 3-step investing system: You’ll get our cutting-edge research and analysis, as well as access to each company we invest in and each trade we make. Choose from our 6 month or 1 year options.