Income Statement Assignment Help

What is an income statement

Income statement of a company can be defined as the core financial statement of the company that elucidates the loss and the profit that the company has gone through over the period of the time for which the statement has been released. The loss and the profit are thereby determined by taking the revenues that has been gathered by the company and the same has been subtracted with the expenses that had been accumulated both in the operating as well as in the non-operating activities.  

The income statement is considered as one of those three important statements that are considered in the corporate finance as well as in accounting. The statement is used in order to display the revenue that has been earned by the company along with the gross profit, cost, administrative expanses and selling. All these information is crucial for developing an understanding on the company both in a logical as well as in a logical manner (Bailey 1948).

Components of an Income Statement

First component of income statement is the revenue and sales. The sales revenue comprises of the revenue of the company. The next component is the cost of Goods sold which refers to the line of items which aggregates the cost associated with the selling of the product in an attempt to enhance the revenue. The next component is gross profit which is calculated by subtracting the costs of the good sold from the sales revenue that had been generated.

The income statement also includes the expenses that had been made in the marketing, advertising and promotions of marketing. All these expenses as accumulated in the marketing and advertising related concerns have been related to selling. The administration and the general expenses of the organization includes all the indirect cost that has been involved in the process and operation of the business. All the aspects come under to be the effective component of income statement. EBTIDA includes aspects of Earnings before Interest, Tax, Depreciation, and Amortization as well which requires to be subtracted from the gross profit as earned by the company. Operational income is representative of the earning from the regular operation in the business. Operating income is representative of the profit that had been accumulated before non-operating expenses. Other components of the income statement is the interest, other expenses, EBT or the pre-tax income, income tax and net income, all of them comes together to give the shape to the income statement (Bhamornsiri and Wiggins 2001).

Importance of an income statement

The importance of the income statement is because of its financial importance as it reflects the overall profitability of the company. Income statement can be used to analyze the efficiency of the business and the ability of the business to translate the expenses into the revenue for the business.

The income statement becomes a determinant the ability of the business to generate its earning in the long term and assists in making important decision in business whether they should invest in new attributes or if they should continue with the new and wait for the company to reach out to a strong financial position.

Who uses an income statement?

The income statement is of use to the internal and external users. The internal users include the management of the company and the directors in the boards for whom the information is of crucial importance to analyze the standing of the business and make decisions in order to generate the profits for the organization. The internal users can also act on concerns like the flow of cash. The investors can analyze the position of the company in terms of growth and make them profitable for the business in future. This understanding allows them to make future decision in terms of making investment with the organization in future. The external users include the competitors who use the income statement in order to understand if the company is in a position to pay off their loans. Competitors can also use the details in order to understand the success parameters of the business and develop an understanding of the areas where the business in making additional expenditure like the ones of R&D (Black and White 2003).

Income Statement Structure

The structure of the income statement includes following attributes

• Operation revenue
• Cost of the goods sold
• Gross profit
• Advertising, marketing and promotional expenses
• Administrative and general expenses
• EBITDA
• Amortization and deprecation
• EBIT or Operating Income
• Interest
• EBT
• Tax
• Net Come

The basic formula that is used in formulating the income statement is as follows

Net income or net loss is calculated but subtracting the total expenses from the total revenue. Though the components in the income statement varies from one company to the other the main understanding remains the same.

Multi-Step Income Statement Example

The multi-step income statement provides a detail of the gain or losses of the business for a reporting period which is done withing a specific period of time. The financial performance of the business is analyzed in an in-depth manner. The format of the multi-step statement separates the operating revenue of the company along with its operating expenses from the revenues and expenses that are accumulated in the non-operating ones.  The multi-step income statement provides an insight into the activities that are primary to the business and generate affect cost as well as income as compared to the performance of the activities that are non-essential (Penman 2009).

How to Build an Income Statement in a Financial Model

The first step of developing an income statement in the form of financial model is embedded in inputting the historical financial information into a segregated way. The next step is to determine the assumption that is most likely to drive the forecast. The next step is developing a forecast of the income statement followed by the forecasting of the capital assets, financial activities and balance sheets. The concluding step in this regard is to complete the statement of cash flow. All the steps come together to give a form to the financial model of the income statement (Beresford et al., 1996).

References

Bailey, G.D., 1948. The increasing significance of the income statement. Journal of Accountancy (pre-1986), 85(000001), p.10.

Beresford, D.R., Johnson, L.T. and Reither, C.L., 1996. Is a second income statement needed?. Journal of Accountancy, 181(4), p.69.

Bhamornsiri, S. and Wiggins, C., 2001. Comprehensive income disclosures. The CPA Journal, 71(10), p.54.

Black, E.L. and White, J.J., 2003. An international comparison of income statement and balance sheet information: Germany, Japan and the US. European Accounting Review, 12(1), pp.29-46.

Penman, S.H., 2009. Accounting for intangible assets: There is also an income statement. Abacus, 45(3), pp.358-371.