The income statement is one of the three major financial statements. The other statements are the balance sheet and the statement of cash flow. The purpose of the income statement is to report the company’s earnings over a certain period of time. The statement displays the company’s revenue and expense for the reporting period. The bottom line of the statement shows the company’s net income or loss, which shows how much the company earned or lost over the period and how management controls the expenses of the company to generate revenue.
When understanding the income statement you must think of it as one equation.
Total Revenues minus Total Expenses = Net Income.
Revenue – The revenue section displays how much money the company received from the sale of a product or service. This section is also called the gross revenue or sales because expenses have not been deducted.
Expense – The expense section shows how the company spends their money. The amount of money the company spent to sell the product or service. Such expenses are salaries for employees, materials needed to perform the service or produce the product, rent, utilities, and travel. The subcategories of the expenses are:
Direct Cost: A portion of the expenses that deals with direct costs, which are the costs that can be directly traced to the product such as direct labor and travel.
Indirect cost: The other portion is the indirect costs which are cost that cannot be traced directly to the product. Some examples include advertising, accounting services, and general supplies.
Other Income (Expense): This section includes the interest expense which is all the cost associated with the company’s borrowing.
Provision for Income Tax: The federal and state taxes are deducted in this section.
Once all the expenses are deducted from the revenue we arrive at the bottom line- Net income or loss. This amount shows the company’s probability during the period and answers the question “Did the company make a profit or did it lose money?”