Financial Statements: List of Types and How to Read Them

It presents revenue, expenses and ultimately, profit or loss in a straightforward way that involves a single calculation. Your cost of goods sold includes the direct labor, materials, and overhead operating expenses you’ve incurred to provide your goods or services. Add up all the cost of goods sold line items on your trial balance report and list the total cost of goods sold on the statement directly below the revenue line item. A quarterly income statement shows the gross profit or loss generated by your business over a three-month period. It can also be referred to as a profit or loss account and is a crucial financial statement that shows the business’s operating income and expenditures, detailing your net income or net profits.

The purpose of an income statement is to show a company’s financial performance over a given time period. The other two portions of the cash flow statement, investing and financing, are closely tied with the capital planning for the firm which is interconnected with the liabilities and equity on the balance sheet. Investing cash activities primarily focus on assets and show asset purchases and gains from invested assets. The financing cash activities focus on capital structure financing, showing proceeds from debt and stock issuance as well as cash payments for obligations such as interest and dividends. “The income statement reflects the income earned and expenses paid net of either profit or loss for a period,” Mitchell Freedman, a certified public accountant at MFAC Financial Advisors, told business.com. “If you are selling services or merchandise, this is the measurement of how the company is performing.”

Example of a Cash Flow Statement

For example, for future gross profit, it is better to forecast COGS and revenue and subtract them from each other, rather than to forecast future gross profit directly. Generally, a comprehensive analysis of the balance sheet can offer several quick views. In order for the balance sheet to ‘balance,’ assets must equal liabilities plus equity.

Gross Profit Gross profit is calculated by subtracting Cost of Goods Sold (or Cost of Sales) from Sales Revenue.

What is an example of an income statement?

Often, the first place an investor or analyst will look is the income statement. The income statement shows the performance of the business throughout each period, displaying sales revenue at the very top. The statement then deducts the cost of goods sold (COGS) to find gross profit. You don’t need fancy accounting software or an accounting degree to create an income statement. Our expert bookkeepers here at Bench have built an income statement template in Excel that you can use to assess the financial health of your business and turn your financial information into an income statement.

Nevertheless, many small business owners don’t think they need to create one. “Too many businesses operate at the seat of their pants and start putting internal controls and accounting systems in place to catch up with growth,” he said. Cost of goods and services in an income statement denote the expenses incurred to sell the final goods. They also include the costs of materials used to develop the products and the labor needed to get the goods to market. Simply put, this is the money a business or company earns by offering services or goods. For a manufacturing company, operating revenue will be the money earned on selling the final product.

What is an income statement, and why is it useful?

As we saw, while a single-step income statement is straightforward and easy to understand, a multi-step could pose significant challenges, especially if you’re just starting out in accounting. By taking our course Fundamentals of Financial Reporting you’ll be ready to tackle these and most other accounting scenarios you’re likely to encounter in your practice. Non-operating expenses, on the other hand, refer to costs income statement accounts incurred but not linked directly to the core functions of a business. Such expenses include obsolete inventory charges or even the settlement of a lawsuit. These two reports feature different line items, meaning the end number and the data being gathered are not identical. Income statements help business owners discover if they can generate profit by increasing revenues, decreasing costs, or a combination of both.

• Companies produce three major financial statements that reflect their business activities and profitability for each accounting period.
• The income statement is one of the most important financial statements because it details a company’s income and expenses over a specific period.
• Next, you’ll need to calculate your business’s total sales revenue for the reporting period.
• During the reporting period, the company made approximately $4.4 billion in total sales.

Reducing total operating expenses from total revenue leads to operating income (or loss) of $69.92 billion ($168.09 billion – $98.18 billion). This figure represents the earnings before interest and taxes (EBIT) for its core business activities and is again used https://www.bookstime.com/ later to derive the net income. The income statement focuses on the revenue, expenses, gains, and losses reported by a company during a particular period. The income statement shows the financial health of a company and whether or not a company is profitable.

Starting with direct, the top line reports the level of revenue a company earned over a specific time frame. Direct expenses are generally grouped into cost of goods sold or cost of sales, which represents direct wholesale costs. Gross profit is then often analyzed in comparison to total sales to identify a company’s gross profit margin. There are several types of income statements you can employ to stay on top of profit and losses, with varying degrees of complexity. For small business owners, the single-step income statement and the multistep income statement are the most popular.