- Cash Burn Rate Formula & Calculation
- How to Set Financial Goals and Objectives for Your Business
- The Benefits of Having a Solid Business Plan
- Strategies For Identifying and Analyzing Your Target Market
- Creating a Business Plan for Product Development
FinModels Lab has created a fancy but informative dashboard to visualize the strengths and weaknesses of your business by simply passing Annual Financial Performance Dashboard. A well-built template is designed for users without advanced Excel skills. Just enter the numbers in the appropriate cells and run the dashboard smoothly.
After reading this article, you should be Apple to learn:
- What is the income statement
- Commonly head of accounts in the income statement
- Method of preparing the income statement
- FREQUENTLY ASKED QUESTIONS
What is the income statement
The Dictionary.com explains statement as a sentence that tells the reader a fact or idea about a single topic. Thus, the income statement is basically a statement that tells the story of the organization’s income and expenses. Some companies call it a joint income statement, while others call it the “income and expense account.”
The income statement tells the history of a business’s operations and indicates how profitable a business has been over a certain period. In other words, this statement tells the story of the business earned over a specific period. The income statement can be prepared for any period, including monthly, quarterly, half-yearly or annually. The simple formula for calculating the income statement is to subtract all expenses from income.
Technically, the income statement is a coherent and logical presentation of a business’s income and expenses. The simple income statement format is reduced below for my favorite restaurant business.
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Restaurant ABC income statement For the period ended June 30, 2021 Amount in “000” |
||
|
Description |
2021 |
2020 |
|
Revenue – Food sales – Beverage sales |
850.00 350.00 |
750.00 250.00 |
|
Total income |
1,200.00 |
1,000.00 |
|
Cost of Goods Sold – Food sales – Beverage sales |
275.00 220.00 |
235.00 135.00 |
|
Total cost of goods sold |
(495.00) |
(370.00) |
|
Gross profit |
705.00 |
630.00 |
|
Operating Expenses – Hire – public services – general administration costs – Marketing costs – amortization |
60.00 35.00 70.00 65.00 4.00 |
56.00 32.00 85.00 90.00 3.50 |
|
Total operating cost |
234.00 |
266.50 |
|
Profit before income tax |
471.00 |
363.50 |
|
18% tax |
85 |
65.00 |
|
net profit |
386.00 |
298.5 |
IMPORTANT NOTE: We designed for free Monthly income statement & Annual income statement where you just need to put your numbers in the yellow cells and see the horizontal/vertical analysis and the nice graphs.
Download the annual income statement in Excel Download Monthly Income Statement in Excel
The income statement is one of the most important statements along with the statement of financial position (commonly referred to as the balance sheet) and the cash flow statement.
Commonly head of accounts in the income statement
To better understand the income statement, the reader should be familiar with the following general accounting terminologies. Let’s explain in easy words with examples.
Income
The income is generated by the sales of products/services and it is the main source of income. Revenue is the first line on a company’s income statement. In our restaurant example, revenue generated from sales of burgers, sandwiches, fries, cold drinks, etc. is the income of “ABC restaurant”.
Cost of Goods Sold
A business is also referred to as “direct cost”, the cost incurred by a business to produce goods or services. This is normally the second line of the income statement and the basic purpose of separating this cost from other expenses is to show a clear picture on how much the business is spending on goods sold. In our restaurant example, the cost of goods includes money spent on bread rolls, meat, cheese, drinks, etc. It is directly proportional to revenue and therefor also called “variable cost” and as sales increase the cost of goods sold increases in specific proportions (i.e. more burgers sold means smaller breads, meat, cheese, etc. will be purchased).
Gross profit
is simply the difference between revenue and cost of goods sold. Business leaders use this thing to measure the operational efficiency of a business. Normally gross profit is divided by revenue called gross profit margin and compared to previous periods and competitors to check how efficient the supply chain and processes of a business are. The higher the gross profit, the better off the business as it has more cushion to meet other expenses and save money. In our income statement for ABC restaurant, the gross profit margin increased from 63% (FY-2012) to 59% (FY-2021) and therefore it shows that the company will be cautious and investigate the reason the decrease in gross profit.
Operating Expenses
Normally abbreviated as OpEx, the expenses which the company must incur to carry out its main operations. It includes rent, utilities, wages, repair and maintenance, etc. Some of the expenses of operational expenses are fixed like rent, salaries, etc., while others can be variable like repairs and maintenance, marketing, etc. Operating expenses are many include cash items (whether paid or payable) while some include non-cash items such as depreciation and amortization.
net profit
It is for this that the business activity was carried and it is the residual of all income and earnings less all expenses (cash or not hidden) incurred by the business. It shows the wealth earned by a business during a specific period, as it is what a business activity has saved after meeting all the expenses. The higher the net profit, the better and vice versa. Business leaders compare net profit margins (net profit ÷ total revenue) with previous periods and with competitors. In our income statement for ABC restaurant, the gross profit margin increased from 30% (FY-2012) to 32% (FY-2021) and therefore it shows that the company manages its resources better.
TIP: In our restaurant example above, gross profit margin decreased by 4% from prior periods, however, net profit increased by 2% from prior period. This shows that the company may be causing abnormal loss or fraudulent leakage in business and companies need to focus more on inventory level controls.
It is important to mention here that there is no hard and fast rule to classify an expense as Cost of Goods Sold or Operating Expense and it only depends on the main business activity. For example, in case of a restaurant, the expenses incurred on the ambience of the restaurant are operational expenses, however, it is the cost of goods sold for a real estate business.
IMPORTANT NOTE: Check out our specially designed Annual Financial Performance Dashboard which helps you prepare an income statement along key performance indicators which are ready to be included in pitch decks and business plans .
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Method of preparing the income statement
It depends on the accounting conventions followed by the company. Many businesses today use basic bookkeeping accounting, while some use basic cash accounting.
In the event that the Company has adopted the accounting basis of accounting, any income received or not received but earned must be recorded in order for it to be reflected in the income statement. Similarly, in case of expenses, without determining whether the money is actually paid, an expense if incurred should be recorded to reflect on the income statement. However, in case of cash basis of accounting, income is recorded only when received and expenses are recorded when paid and in the period, or receipts/payments, same is true for be reflected in the income statement.
FREQUENTLY ASKED QUESTIONS
Q. What is the difference between the income statement and the profit and loss account?
Q. Do the financial models include the income statement?
IMPORTANT NOTE: We have hundreds of Financial Model Templates Designed for each different business that makes a big impression on your investors/bankers.
Q. What is the difference between net income and comprehensive income?
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