An income statement presents the results of the company’s financial operations for a specified accounting period. Accounting periods may be quarterly or yearly as required by laws and regulations. This statement records the income and expenses in a particular accounting period and finally arrives at net profit.
This statement records the income and expenses in a particular accounting period and finally arrives at net profit.
The business’s financial performance in terms of income and expenses involves the summary prepared by using the data from both operating and non-operative activities.
The income statement must reflect all the items of profit and loss recognized during the accounting period except items that need prior period adjustments and those that should be disclosed directly in the balance sheet.
This statement is used by many different kinds of stakeholders and for many different purposes.
The users are ranging from employees, management, shareholders to external parties like bankers and regulators.
It is used to assess an entity’s profitability, and sometimes it is used to assess an investment opportunity.
Advantages of income statements:
- Information about revenue: Income statement provides thorough information about normal costs such as COGS and expenses associated with managing operations. It also accounts for additional costs including statutory taxes which is applied to gross revenue to arrive at net profit. Revenue also includes income from indirect sources such as interest income from business investments.
- Providing for Investor Analysis: Income Statement is an important document to provide information to prospective investors looking to buy stake in the business. Income statement makes it easier for calculation of earnings per share using the net profit. The higher the earnings per share, the better the prospect of business is going forward. Income statement is therefore an important checklist for the investors to gain stake in the business.
- Tracking the performance of business: Performance means profit and income statement, it is both gross profit and net profit. Performance growth is bottom line growth which needs to be tracked on regular basis. While analyzing revenue over various accounting periods, overall performance of the business must be reviewed and opined on. This helps the user to spot the trend early as possible and eliminate one-time charges that may affect the data.
- Means for Effective forecasting: Financial modelling requires the effective forecast of future accounting periods. Generally, the forecasts are prepared to sketch the future over 3 and 5 years. Income statements perfectly anticipates problems that may arise in the future.
- Overview of Cash Flows: Although cash flow statement is prepared specially for the movement of cash, the income statement can show eagle eye view of the movement of cash along with accruals and receivables on one accounting statement. This helps in making adjustments, following the cash trail and ultimately saving cash access for the future.
- Operating and Non-operating Income: Income Statement segregates into operating income and non-operating income. This helps the business owner to analyze how much of the revenue is derived from operating i.e. regular business activities and how much income is from non-business activities. Robust operating income with growth thereon is a good sign for healthy businesses. It is also needed to be understood that operating income forms at least 80 % of the total revenue of the business. Non-operating income are very irregular income or one-off income that do not impact the financial viability of the business.