An income statement is a very common financial statement used in all business to assess the financial results within a specified time. The statement presents the revenues and the expenses incurred during the year. This calculation of revenues against the expenses brings the concluding profit or net loss. Hence, the income statement is a tool used to review the profit/loss a company has earned.
A company spends on various expenses. The best income statement is one which presents the nature of expenses which includes the administration as well as distribution expenses. If the company is involved in research and development, the expense for research will also be included.
Income statement in itself provides a good analysis, however, for better results, it is best to study the income statements comparatively.
Comparative income statements represent data for multiple periods. This aids the decision makers to analyze the performance over time. The comparative analysis will show any changes in the revenue and expenses. This can help the management to make decisions regarding these items.
The comparatives can be for historical years, quarters or even months. The best representation is to show the current year against the previous years.
Comparative financial statements are issued by the company and they include an income statement, balance sheet and statement of cash flow.
These set of financial statements can help show the trends over a period of time. Any unidentified trends can also raise reasons to investigate by the management. These comparatives can also help to predict the future performance.
Financial analysts study the company financial statements by using ratios and percentages. These ratios can help in predicting the future performance and position of the company.
This comparative analysis has various uses one of which is to determine the future health and stability of the company. The income statement is also known as the profit and loss statement.
Most of the companies use both these terms interchangeably. Profit and loss statement shows the gross profit of the company where the income statement shows the net worth of the company.
The income statement provides the details for the below:
- Revenue: which includes all types of revenue incomes.
- Cost of goods sold: which includes the inventory, purchases and all other expenses related to inventory.
- Expenses: the company can identify the expenses and categorize them into administrative and other expenses.
- Net income: deducting the expenses from the revenue will bring us to the net operating income or the net operating profit.
- Other income: incomes generated other than revenue will also be included in the income statement. Any gains or losses due to the sale of assets will be a part of the statement. The final total will be the net profit/ net income.
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