3.4 Notes: Financial clinic: financial statements: The income statement

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• 2.1 The income statement

• The purpose of the income statement is to show a company’s profit and loss, or profitability

• it shows whether or not a company is earning money.

• the first of the financial statements to be assembled

• Income statements vary from company to company, as different businesses have different types of revenue and expenses. However, broadly speaking, income statements include the following two categories

• Revenues and gains: These include all incomes from the business’s primary and secondary activities, as well as any gains (income from means other than revenue, such as the sale of a long-term asset)

• Expenses and losses: These include all expenses from the business’s primary and secondary activities, as well as any losses (losses made from events not related to expenses, such as a loss on the sale of a long-term asset)

• information into a comprehensive document that calculates whether there is a positive outcome (net profit) or a negative outcome (net loss).

• Net profit and net loss are calculated by subtracting the expenses and losses from the revenues and gains.

• Income statements can be created using the following five steps:

• State the top line. This is the revenue of the business.

• Subtract the cost of goods sold or cost of sales from the revenue to calculate the gross income, also referred to as gross profit or gross margin

• Subtract the operating expenses from the gross income. The result is the earnings before interest, taxes, depreciation, and amortisation (EBITDA

• EBITDA (pronounced “e-bit-dah’’) is an important metric that is used to measure a venture’s performance in terms of operation; that is, how it performs before factors such as tax and depreciation are deducted. This shows how profitable a venture is based on its core operations. It is a necessary consideration when creating the income statement of a business, and when examining the cash flow statement

• Subtract the depreciation and amortisation from the EBITDA. The result is the earnings before interest and tax – or the operating income

• Subtract the interest and tax from the operating income. The result is the net income, or net profit, also known as the bottom line. This can be used to calculate the earnings per share (EPS) by dividing the net income by the number of shares

• The income statement is an important aspect of the financial statements, as it indicates a venture’s profits and losses. The second document in the financial statements, the balance sheet, examines the financial health of a venture as a whole