November 7, 2020 | Posted in Financial Statements
An income statement details the revenues and expenses of a company during a specified period such as a month, quarter, or year. A balance sheet, on the other hand, details a single point in time. It details how revenues and expenses are changed into net income. An income statement is prepared for managers and investors, to determine the financial status of a company during that specified time period.
When preparing an income statement, two formats are used: single step and multi-step statements. The single step method has one simple subtraction, where expenses, operating and non-operating, are subtracted from revenues, operating and non-operating. This is a simpler method and does not provide a subtotal for gross profit or any operating income. The multi-step method is more complex and contains three subtractions. The first provides for gross profit, the second details operating income, and the third provides net income. With all three subtractions considered, the end result is company income before taxes. After taxes are deducted, net income is realized.
In order to prepare an income statement, revenue and expense accounts are reviewed. Revenue accounts detail cash inflows from operations, minus any sales returns, discounts, or allowances. Expense accounts detail cash outflows from operations. Expenses should be divided into nature, which may include materials, depreciation, or salaries, and function, which may include administrative costs.
Expenses include the cost of goods sold, which is the manufacturing or production costs necessary to produce and sell goods. This includes costs of materials and labor. Selling, general, and administrative, or SG&A, expenses, detail payroll costs. This includes salaries and commissions, advertising, utilities, and insurance. Depreciation and Amortization accounts detail fixed and intangible asset charges. Lastly, expenses include research & development costs.
An income statement also includes a non-operating section, detailing revenues and gains outside of regular business activity, such as gains from goodwill, patents, or copyrights. It includes other expenses and losses outside of regular business activity, such as losses from currency exchange. The non-operating section also contains costs of finance, which include costs of dealing with creditors. Income tax expenses include the amount of tax payable. Income statements also include irregular items such as discontinued operations, which are listed separately from other sections so that they will not interfere with future cash flow predictions.