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Definition
An income statement, also known as a profit and loss statement (P&L), is a financial document that provides a summary of a company’s revenues, expenses, and profits or losses over a specific period of time, typically on a monthly, quarterly, or annual basis.Â
What is an income statement?
Here’s a list of key components included in an income statement:
- Revenue or sales: This represents the total income generated from the sale of goods or services.
- Cost of goods sold (COGS): This includes all the direct costs associated with producing or providing the goods or services sold by the company.
- Gross profit: It represents the profit generated from the core business operations before considering other expenses.
- Operating expenses: These include costs related to sales, marketing, research and development, administrative expenses, and other operating costs.
- Operating income: This reflects the profitability of the company’s normal business operations.
- Other income and expenses: This section includes any non-operating revenues or costs.
- Income before taxes: This is the total income or profit before accounting for income taxes.
- Income tax expense: This represents the amount of taxes owed by the company based on its taxable income.
- Net income: Net income is the final result after deducting taxes from income before taxes.
Income statements are used for comparative analysis over different periods. This helps in evaluating performance trends and identifying areas of improvement or concern.
Publicly traded companies are required to prepare and publish income statements as part of their financial reporting obligations to regulatory authorities and shareholders.
While income statements provide valuable information about a company’s financial performance, they do not provide a complete picture of its overall financial health. They do not account for factors like changes in market conditions, future investments, or non-operating gains or losses.
The income statement is one of the three primary financial statements, alongside the balance sheet and cash flow statement. Together, these statements provide a comprehensive view of a company’s financial position and performance.
Example of income statement
Let’s consider a simplified example of an income statement for a fictional company, XYZ Corporation.
| Revenue: Sales Other income Total revenue | £500,000 £5,000 £505,000 |
| Cost of goods sold: Cost of goods manufactured Operating expenses Total operating costs | £200,000 £100,000 £300,000 |
| Gross profit Operating expenses: Selling expenses General and administrative Research and development Total operating expenses | £205,000 £50,000 £30,000 £15,000 £95,000 |
| Operating income Other income/expenses: Interest income Interest expenses Tax provision Net other income/expenses | £110,000 £2,000 -£8,000 -£20,000 -£26,000 |
| Net income before tax Income tax expense | £84,000 -£15,000 |
| Net income | £69,000 |
This simplified income statement provides a summary of the company’s financial performance, detailing revenue, costs, and expenses to arrive at the net income for a specific period.
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