First, please create an account

Already have a Sophia account?

Income Statement

Author: Sophia

what's covered

This lesson will cover the income statement. Specifically, this lesson will cover:

1. Income Statement
2. Income Statement vs. Balance Sheet
3. Types of Income Statements
4. Single Step Income Statement Components

1. Income Statement

Before we begin our discussion of the income statement, it is important to take a step back and define financial statements, which are reports providing financial information about a business at a given time.

An income statement, then, is a financial statement that provides information about the revenue, expenses, and net profit or loss of a business for a given time period. A key phrase in that definition is "a given time period."

Let's break down the net profit or loss idea. The income statement helps to identify the business's profitability, which is a key component of the purpose of the income statement:

The income statement reports on one year or less of a time period.
The income statement helps to assess the health or strength of a business, which is important information for shareholders and potential investors, as well as banks.

Now, the income statement formula is revenues minus expenses equals net income, revenues being the inflows from the business operations and expenses being the outflows or the use of assets from the business operations.

terms to know

Financial Statements

Reports providing financial information about a business at a given time.

Income Statement

A financial statement that provides information about the revenue, expenses, and net profit or loss of a business for a given time period.

2. Income Statement vs. Balance Sheet

Now let's compare the income statement to the balance sheet. Keep in mind that the balance sheet reports balances and the income statement reports activity.

Type of Financial Statement	Reporting	Accounts Included	Decision Tool
Income Statement	Reports for a period of time; activity based	Temporary accounts; revenues and expenses	Assess past performance and predict future performance
Balance Sheet	Reports at a point in time	Permanent accounts; assets, liabilities, and equity	Primarily forward-looking; identify the business's position, as of a certain date, and the implications going forward

3. Types of Income Statements

There are two types of income statement formats: single step and multi-step.

The single step income statement is called such because there is only one step. Remember the income statement formula? Revenues minus expenses equals net income. This is what the single step income statement looks like, below. You take your revenues, subtract out your expenses, and arrive at your net income.

formula to know

Income Statement (Single Step)

table attributes columnalign right end attributes row Revenues row cell stack negative space Expenses with bar below end cell row cell Net space Income end cell end table

The multi-step income statement, on the other hand, has multiple steps.

First, you start with your sales and subtract the cost of goods sold to get your gross profit.
Second, you take that gross profit and subtract all of your operating expenses from the business operations to get to income from operations.
Third, once you have income from operations, you subtract the other revenues and expenses to ultimately arrive at your net income.

formula to know

Income Statement (Multi-Step)

table attributes columnalign right end attributes row Sales row cell stack negative space Cost space of space Goods space Sold with bar below end cell row cell Gross space Profit end cell row cell stack negative space Operating space Expenses with bar below end cell row cell Income space from space Operations end cell row cell stack negative space Other space Revenues space left parenthesis Expenses right parenthesis with bar below end cell row cell Net space Income end cell end table

At the end of the day, the single step and multi-step income statements arrive at the same place, but the multi-step statement has several individual steps that involve calculating gross profit and separating out income from operations, as well as other revenues and expenses.

watch

4. Single Step Income Statement Components

Let's look at an example of a single step income statement and break down its component parts:

Table with header that includes Acme Inc., Income Statement, and For the period ending December 31, 2022. The revenue section lists Sales and Interest Revenue with respective amounts, culminating in a Total revenue of $310,000. The expenses section includes Selling expense, Rent expense, Marketing expense, and Interest expense, totaling $175,000. Below these sections, the table calculates a Net Income of $135,000 and an Earnings Per Share of 1.35. — View this spreadsheet in Google Sheets

Income Statement Component	Description
Header	It is important that the header includes the words, "For period ending...", because this indicates that the income statement is reporting on activity for a given period.
Revenues	This section includes sales and any other revenue--in this case, interest revenue. It reflects the total revenue from the single step income statement formula.
Expenses	Next is a detail of all expenses. In this case, there are some selling expense, rent expense, marketing expense, and interest expense, summed to equal the total expenses.
Net Income	The total revenue of $310,000 minus total expenses of $175,000 equals a net income of $135,000.
Earnings per Share	This is the other piece of information contained on this single step income statement, calculated by taking the net income and dividing it by the number of shares that are owned and issued by the company. If this was a publicly traded company and they had shares on an exchange, you would list the earnings per share. In this case, we assumed there were 100,000 shares, so the earnings per share are $1.35 per share.

try it

Review the following single step income statement and determine if it has the proper components.

Table with header that includes Acme Inc., Income Statement, and For the period ending December 31, 2022. The revenue section lists Service Revenue and Interest Revenue with respective amounts, culminating in a Total revenue of $520,000. The expenses section includes Salaries expense, Rent expense, Software expense, and Income tax expense, totaling $310,000. Below these sections, the table calculates a Net Income of $210,000 and an Earnings Per Share of 1.05. — View this spreadsheet in Google Sheets

Does it have a header?

Yes, you can see the company name, "Income Statement," and "For the period ending December 31, 2022."

Does it detail the revenues?

Yes, revenues are detailed; in this case, service revenue and interest revenue.

Does it detail the expenses?

Yes, expenses are also detailed, slightly different from our first example. In this case, the expenses include salaries, rent, software and income tax, summed to provide the total expenses.

Does it detail the net income?

Yes, net income is calculated by taking total revenue and subtracting total expenses.

Does it detail the earnings per share?

Yes, the bottom of the statement includes the earnings per share figure. Assuming we had 200,000 shares outstanding, earnings per share are $1.05 per share.

watch

summary

Today we learned all about the income statement, which is a financial statement that provides information about the revenue, expenses, and net profit or loss of a business for a given time period. Remember, those words at the end--"for a given period of time"--are very important because the income statement is activity-based. We compared the income statement vs. balance sheet, and learned about the two types of income statements: the single step and the multi-step. Lastly, we examined two examples of the single step income statement, utilizing the single step of the income statement formula: total revenues minus total expenses equals net income.

Source: THIS TUTORIAL WAS AUTHORED BY EVAN MCLAUGHLIN FOR SOPHIA LEARNING. PLEASE SEE OUR TERMS OF USE.

Terms to Know

Financial Statements: Reports providing financial information about a business at a given time.
Income statement: A financial statement that provides information about the revenue, expenses, and net profit or loss of a business for a given time period.

Formulas to Know

Income Statement (Multi-Step): $Sales bottom enclose negative space Cost space of space Goods space Sold end enclose Gross space Profit bottom enclose negative space Operating space Expenses end enclose Income space from space Operations bottom enclose negative space Other space Revenues space left parenthesis Expenses right parenthesis end enclose Net space Income$
Income Statement (Single Step): $Revenue bottom enclose negative space Expenses end enclose Net space Income$