Statement of Income Example Calculating with the Multi-Step Statement

Make sure to research how to write a business plan and what is financial accounting as you prepare your income statement. The income statement formula is used to calculate the net income or net loss of a business. Total revenues include all sources of income, while total expenses include both operating and non-operating costs. Operating expenses are the definition and calculation of federal income tax related directly to the operations of the business, such as the cost of goods sold, wages, and taxes. Non-operating expenses are unrelated to the operations of the business, such as interest expenses or gains and losses on investments. The result is either a positive net income or a negative net loss which is then reported on the income statement.

Debt interest expense is deducted from operating profit, to determine a company’s taxable income. This line item summarizes total income for a period, usually a quarter or a year. Some industries, such as retailers, report total sales as well as net sales, which accounts for customer returns of merchandise. Depreciation expenses are reported like any other normal business expense on your income statement, but where you include it depends on the nature of the asset being depreciated.

• However, there are several generic line items that are commonly seen in any income statement.
• Creditors, on the other hand, aren’t as concerned about profitability as investors are.
• This is used to fund public services, provide goods for citizens, and pay government obligations.
• After discounting for any nonrecurring events, it’s possible to arrive at the value of net income applicable to common shares.

An income statement is one of the most important financial statements for a company. The single-step income statement lumps together all of XYZ Corporation’s revenues and gains and these amounted to $94,000. A single-step income statement is useful when your business does not have complex operations or only needs a simple statement that could report the net income of a business. Operating expenses totaling $37,000 were then deducted from the gross profit to arrive at the second level of profitability – operating profit which amounted to $6,000. EBT, also referred to as pre-tax income, measures a company’s profitability before income taxes are accounted for.

Interest expense

It is also practical to use this format when you do not need to separate operating expenses from the cost of sales. EBIT is helpful when analyzing the performance of the operations of a company without the costs of the tax expenses and capital structure impacting profit. Non-operating revenues are revenues that a company earns from activities that are not related to its primary business operations. This is the profit before any non-operating income and non-operating expenses are taken into account. Example Corporation is engaged in the purchase and sale of goods (products, merchandise).

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Income tax expense

The income statement is also vital for ratio analysis, equity research, and valuation of the company. Income statements also provide a good source of analysis for investors that are willing to invest in the business. It provides them with a summary of the performance of the company during a specific period. From this amount, the cost of goods sold amounting to $47,000 is deducted in order to arrive at the first level of profitability which is the gross profit. This represents the profit that a company has earned for the period, after taking into account all expenses. Income taxes are taxes imposed by governments on income generated by individuals and businesses within their jurisdiction.

These are expenses incurred while operating the business and not directly related to production. They are reported separately from COGS in the income statement and include expenses for salespeople and office staff, marketing and advertising, rent for office space, and utilities. Depending on a company’s transparency, these may be listed individually under the heading SG&A. In other words, it’s the profit before any non-operating income, non-operating expenses, interest, or taxes are subtracted from revenues. EBIT is a term commonly used in finance and stands for Earnings Before Interest and Taxes. The income statement calculates the net income of a company by subtracting total expenses from total income.

The total revenue and gains generated during the period are $ 110,000 and $ 150,000, respectively, and the total expenses and losses incurred are $80,000 and 100,000. Therefore, prepare the income statement for the six months ending June 30, 2018. A total of $560 million in selling and operating expenses, and $293 million in general and administrative expenses, were subtracted from that profit, leaving an operating income of $765 million.

It’s a snapshot of your whole business as it stands at a specific point in time. Net profit, also called “net sales” or “net earnings,” is the total profit for your business. How you calculate this figure will depend on whether or not you do cash or accrual accounting and how your company recognizes revenue, especially if you’re just calculating revenue for a single month.

Why Income Statements are So Important

Here’s how to put one together, how to read one, and why income statements are so important to running your business. Consider enrolling in Financial Accounting—one of three courses comprising our Credential of Readiness (CORe) program—which can teach you the key financial topics you need to understand business performance and potential. After calculating income for the reporting period, determine interest and tax charges.

• Single-step income statement – the single step statement only shows one category of income and one category of expenses.
• The income statement is also vital for ratio analysis, equity research, and valuation of the company.
• To this, additional gains were added and losses subtracted, including $257.6 million in income tax.
• To have a more thorough look at how double-entry bookkeeping works, head to FreshBooks for a gallery of income statement templates.
• A single-step income statement is useful when your business does not have complex operations or only needs a simple statement that could report the net income of a business.

The purpose of having an income statement for the company is to demonstrate its financial performance over a specific period. It speaks about the financial story of the company through its activities and operations. The other two important financial statements are the balance sheet and cash flow statement. The multi-step income statement reflects comprehensively the three levels of profitability – gross profit, operating profit, and net profit. While primary revenue and expenses offer insights into how well the company’s core business is performing, the secondary revenue and fees account for the company’s involvement and expertise in managing ad hoc, non-core activities.

Income Statement Example

Research analysts use the income statement to compare year-on-year and quarter-on-quarter performance. One can infer, for example, whether a company’s efforts at reducing the cost of sales helped it improve profits over time, or whether management kept tabs on operating expenses without compromising on profitability. Cost of goods sold expenses are reported in the gross profit reporting section while the operating expenses are reported in the operations section. Other expenses are reported further down the statement in the other gains and losses section. The income and expense accounts can also be subdivided to calculate gross profit and the income or loss from operations.

Operating profit, or operating income, is the amount left after all internal costs—COGS and SG&A—are subtracted. An income statement helps business owners decide whether they can generate profit by increasing revenues, by decreasing costs, or both. It also shows the effectiveness of the strategies that the business set at the beginning of a financial period.

Finance Strategists is a leading financial literacy non-profit organization priding itself on providing accurate and reliable financial information to millions of readers each year. This is because lenders want to know the ability of the company to generate revenue and profit, as well as its capacity to repay the loan. Losses can be the result of one-time or any other extraordinary expenses, or lawsuit expenses. Examples of gains are proceeds from the disposal of assets, and interest income.

A single-step statement of Income only shows a single category of all income and all expenses. Moreover, this statement might not be helpful for stakeholders who need detailed information, but it accurately calculates the net income for the year. Horizontal analysis makes financial data and reporting consistent per generally accepted accounting principles (GAAP).

This income statement shows that the company brought in a total of $4.358 billion through sales, and it cost approximately $2.738 billion to achieve those sales, for a gross profit of $1.619 billion. This type of analysis makes it simple to compare financial statements across periods and industries, and between companies, because you can see relative proportions. Within an income statement, you’ll find all revenue and expense accounts for a set period.

Our expert bookkeepers here at Bench have built an income statement template in Excel that you can use to assess the financial health of your business and turn your financial information into an income statement. These expenses are listed individually here, but some income statements will bundle these and other similar expenses together into one broad category called “Selling, General & Administrative Expenses” (SG&A). The income statement is also known as a profit and loss statement, statement of operation, statement of financial result or income, or earnings statement.

Example of a traditional income statement

These include dividend income, and proceeds from sale of extraordinary items. However, it uses multiple equations to determine the net profit of the company. In the first section under Revenues, you’ll see each of Ford’s major revenue streams, including car sales under Automotive, Ford Credit, and Mobility. In the notes section of the 10-Q, the Mobility line refers to Ford’s autonomous vehicles and related business as well as its equity stake in Argo AI. In the present case, it can be seen that the company has generated a Net Income of $ 10,930 during the period under consideration.

Vertical analysis refers to the method of financial analysis where each line item is listed as a percentage of a base figure within the statement. This means line items on income statements are stated in percentages of gross sales, instead of in exact amounts of money, such as dollars. Both statements will produce the same net income number, but they differ in how they arrive at the bottom line. Traditional income statements account separately for direct product costs (COGS), which may be a combination of variable costs and fixed costs, and indirect costs (SG&A). A contribution margin statement separates variable expenses and fixed costs. A single-step income statement, on the other hand, is a little more straightforward.