What is 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. Also known as the profit and loss statement or the statement of revenue and expense, the income statement primarily focuses on company’s revenues and expenses during a particular period. BREAKING DOWN 'Income Statement' Income statement is an important part of the company’s performance reports that must be submitted to the Securities and Exchange Commission (SEC). While a balance sheet provides the snapshot of company’s financials as of a particular date (like, as on 30 September 2018), the income statement reports income through a particular time period and its heading indicates the duration which may read as “For the (fiscal) year/quarter ended September 30, 2018,” (See also, What is the difference between an income statement and a balance sheet?) The income statement focuses on the four key items - revenue, expenses, gains and losses. It does not cover receipts (money received by the business) or the cash payments/disbursements (money paid by the business). It starts with the details of sales, and then works down to compute the net income and eventually the earnings per share (EPS). Essentially, it gives an account of how the net revenue realized by the company gets transformed into net earnings (profit or loss). The following are covered in the income statement, though its format may vary depending upon the local regulatory requirements, the diversified scope of the business and the associated operating activities: Revenues and Gains: Operating Revenue: Revenue realized through primary activities is often referred to as operating revenue. For a company manufacturing a product, or for a wholesaler, distributor or retailer involved in the business of selling that product, the revenue from primary activities refers to revenue achieved from sale of the product. Similarly, for a company (or its franchisees) in the business of offering services, revenue from primary activities refers to the revenue or fees earned in exchange of offering those services. Non-operating Revenue: Revenues realized through secondary, non-core business activities are often referred to as non-operating recurring revenues. These revenues are sourced from the earnings which are outside of purchase and sale of goods and services, and may include income from interest earned on business capital lying in the bank, rental income from business property, income from strategic partnerships like royalty payment receipts or income from an advertisement display placed on business property. Gains: Also called as other income, gains indicate the net money made from other activities, like sale of long-term assets. These include the net income realized from one-time non-business activities, like a company selling its old transportation van, unused land, or a subsidiary company. Revenue should not be confused with receipts. Revenue is usually accounted for in the period when sales are made or services are delivered. Receipts are the cash received, and are accounted for when the money is actually received. For instance, a customer may take goods/services from a company on 28 September which will lead to the revenue being accounted for in the month of September. Owing to his good reputation, the customer may be given a 30-day payment window. It will give him time till 28 October to make the payment which is when the receipts are accounted for. Expenses and Losses: Expenses linked to primary activities: All expenses incurred for earning the normal operating revenue linked to the primary activity of the business. They include cost of goods sold (COGS), selling, general and administrative expenses (SG&A), depreciation or amortization, and research and development (R&D) expenses. Typical items that make up the list are employee wages, sales commissions, and expenses for utilities like electricity and transportation. Expenses linked to secondary activities: All expenses linked to non-core business activities, like interest paid on loan money. Losses: All expenses that go towards loss-making sale of long-term assets, one-time or any other unusual costs, or expenses towards lawsuits. While primary revenue and expenses offer insights into how well the company’s core business is performing, the secondary revenue and expenses account for the company’s involvement and its expertise in managing the ad-hoc, non-core activities. Compared to the income from sale of manufactured goods, a substantially high interest income from money lying in the bank indicates that the business may not be utilizing the available cash to its full potential by expanding the production capacity, or it is facing challenges in increasing its market share amid competition. Recurring rental income gained by hosting billboards at the company factory situated along a highway indicates that the management is capitalizing upon the available resources and assets for additional profitability. Income Statement Structure - From Revenues to Net Income Mathematically, the Net Income is calculated based on the following: Net Income = (Revenue + Gains) – (Expenses + Losses) To understand the above details with some real numbers, let’s assume that a fictitious sports merchandise selling business which additionally provides training is reporting its income statement for the most recent quarter.
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