How To Read and Understand Income Statements

Your income statement follows a linear path, from top line to bottom line. Think of the top line as a “rough draft” of the money you’ve made—your total revenue, before taking into account any expenses—and your bottom line as a “final draft”—the profit you earned after taking account of all expenses.

How To Analyze an Income Statement

Why is it important to know how to read an income statement?

If you work in business or finance, it’s critical to comprehend a company’s income statement. The following professionals ought to understand how to read an income statement:

An income statement can influence investment and financial decisions. It demonstrates how a business becomes profitable and whether it is effectively managed. If you run a business, your income statement will show you whether it is profitable and where you can cut expenses or make adjustments to boost sales. Additionally, business trends and advancement can be seen by comparing income statements over time.

What is an income statement?

A company generates an income statement, also known as a profit and loss statement, which lists its revenue and expenses on a monthly, quarterly, or annual basis. It computes these numbers to determine the overall profit or loss for the business. Income statements are crucial for accounting purposes and serve to track an organization’s progress. Income statements follow two formats:

Basically, an income statement determines a companys profitability. Income statements for publicly traded companies must be made available to the public. Income statements are also produced by private businesses, but they might not be made publicly available.

Single-step format income statement example

Here is an example of a single-step format income statement:

Rogers Sporting Goods
Income Statement for quarter ended Dec. 31, 2020

How to read a single-step format income statement

Although simpler to make than a multi-step statement, a single-step income statement offers less financial information. It shows pretax and after-tax profitability only. Small businesses with straightforward sources of income and costs may opt for a one-step format. This includes:

How to read a multi-step format income statement

Because a multi-step format income statement offers more detail and information for making business decisions, many companies, especially large and complex ones, use it. It distinguishes between operating and non-operating revenues and expenses. When reading a multi-step income statement, you will see:

To read an income statement, whether it is single-step or multi-step, you must be familiar with the terminology used for common revenue and expense categories. Most income statements include some or all of these items:

Multi-step format income statement example

Here is an example of a multi-step format income statement:

Gold Star Lumber
Income Statement for quarter ended April 1, 2020

FAQ

How do you read an income statement for dummies?

Think of it this way. The income statement details how your company used its assets and liabilities, while the balance sheet lists them. This is your net profit if there is a surplus after the calculations are done. Your company’s net loss will be indicated if you receive a negative number.

What 3 things does an income statement show?

The income statement presents revenue, expenses, and net income. Revenue, cost of sales, sales, general, and administrative expenses, other operating expenses, non-operating income and expenses, gains and losses, non-recurring items, net income, and EPS are the elements of the income statement.

What is the main thing you can learn from an income statement?

An income statement offers useful information about a variety of business aspects. It covers a company’s operations, management effectiveness, potential profit leaks, and whether it is performing on par with its competitors in the industry.

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