The income statement is one of four financial statements. The other three financial statements are the balance sheet, cash flow statement, and statement of retained earnings. The income statement summarizes a company’s revenues and expenses for a given period of time. Companies usually have quarterly and annual income statements. The final figures of an income statement are important to current and future investors.
There are two types of income statements, the single-step income statement and multi-step income statement. The difference between the two types is that the multi-step income statement states the gross and operating income. Although the single-step income statement does not state these incomes, they can still be found by doing some simple math.
Accounts to show on an income statement
Usually accounts that are shown on an income statement are: net sales, cost of sales, gross profit, selling, general, and administrative expenses, operating income, interest expenses, pretax income, income taxes, special items or extraordinary expenses, net income, and comprehensive income. These accounts will vary according to the type of income statement being used and the type of company that the particular income statement is for.
Additionally, when looking at an income statement one must remember that revenues are recognized when they are realized. Meaning, for example, when expenses are incurred, or services are provided. The income statement does not reflect actual cash flow, but rather it shows profitability.
By looking at a company’s income statements from different years, one can see if sales increased, or how expenses increased, decreased, or stayed the same. If a company is able to increase sales while keeping expenses under control it is considered to be an efficient company.