The income statement is an indispensable report for any business. This document is an accounting statement of the same family as the balance sheet and, like it, is of high importance for investors.
What is an Income Statement
An Income Statement is an accounting document that aims to present in a summarized way, the results of the company calculated from the operations carried out in a given period. The standard is 12 months, but for analysis purposes, the DRE may consider other fiscal exercises than just annual.
The Income Statement also serves as a presentation of the company to those who may be interested in your business, as partners or investors. That’s because it demonstrates your company’s ability to generate real results. The DRE can also be used to obtain a loan or financing from a bank, for example.
Breaking it down
Also known as the profit and loss statement or statement of revenue and expense, the income statement is one of three major financial statements in the annual report and 10-K. All public companies must submit these legal documents to the Securities and Exchange Commission (SEC) and investor public. The other two financial statements are the balance sheet and the statement of cash flows. All three provide investors with information about the state of the company’s financial affairs, but the income statement is the only one that provides an overview of company sales and net income.
Unlike the balance sheet, which covers one moment in time, income statement accounts provide performance information about a time period. It begins with sales and works down to net income and earnings per share (EPS). It is divided into two parts: operating and non-operating. The operating portion discloses information about revenues and expenses that are a direct result of regular business operations. The non-operating section discloses revenue and expense information about activities that are not directly tied to a company’s regular operations.
What goes on an income statement
Analysts use the income statement for data using formulas to calculate financial ratios such as return on equity (ROE), return on assets (ROA), gross profit, operating profit, earnings before interest and taxes (EBIT), and earnings before interest taxes and amortization (EBITDA). The income statement is often presented in a common-sized format, which provides each line as a percent of sales. In this way, analysts can easily see which expenses make up the largest portion of sales. Analysts also use it to compare year-over-year (YOY) and quarter-over-quarter (QOQ) performance. The income statement typically provides two to three years of historical data for comparison.
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