Definition of 'Income Statement'
A company’s financial performance and trends are measured and tracked on an income statement, also known as the profit and loss statement and/or the statement of revenue and expense. This statement is issued over a defined accounting period and performance is evaluated based on how the company generates revenue and costs in terms of both operating and non-operating actions.
TheStreet Explains ‘Income Statement’
The income statement scrutinizes all aspects of how a company makes money, including operating features such as vital equipment. The goal of the income statement is to demonstrate to investors or business managers a trend of how the company either made or lost money during a given period of time.
A business manager or accountant generates the income statement and uses several financial categories such as revenue/income, expenses, capital and cost of goods. Other aspects listed as financial projections include gross profit margin, both operating and total expenses, net profit, depreciation, earnings before interest. Revenue or income on the statement will include all revenue streams the business generates.
Unlike a cash flow statement, the income statement does not reflect when the revenue is collected or when expenses are being paid. Instead, the income statement shows the profitability projections of the business over time. Often, the income statement is included in the business plan and will be produced on a monthly basis, usually during the first year (followed by a quarterly statement for the second year, then annually for the third year).
Important to note that for manufacturers, tracking inventory such as raw material, work in progress and the finished product should be considered on the income statement. Generally the “work in progress” line item is listed first on the income statement, which organically leads into the “cost of goods” area of the statement.
Ultimately, companies use income statements to track and chart sales, inventory and overhead strategies. By comparing and contrasting income statements over various time periods, companies can apply the data to not only determine corporate direction but also formulate an annual plan.
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