Low down on Income Statement – Benefits, Analysis and Beyond
5 minute read
There are three core financial statements that investors, lenders and business partners/owners look for while evaluating a business’s financial health. These are income statements/profit and loss statements, balance sheets, and cash flow statements. Under Singapore Law, if a business earns revenue of SGD 500,000 or more, submission of a certified statement of accounts, which includes an income statement and the balance sheet is mandatory.
The income statement is essentially revenues and gains subtracted by expenses and losses from both operating and non-operating activities over a specific time period. These statements show financial trends and can help business owners make educated decisions around topics like decreasing costs, improving sales and so on to ensure a healthy cash flow, and balance sheet.
It is worth noting here that as mentioned above an income statement is distinct from a balance sheet and we’ll discuss it in detail in this blog post. We will also discuss in depth- the benefits of preparing an income statement, factors that make it crucial for businesses and how can you ace income statement creation and analysis.
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Overview:
What Is an Income Statement?
Also known as a profit and loss statement, the income statement is a summary of all income and expenses over a given period. It allows investors, creditors, and business owners the financial tools and trend comparisons, to evaluate the financial health and growth potential of a business.
These also help stakeholders determine if the business is on track with its short-term and long-term goals. In case of flaws being spotted, the action plan can be tweaked to put the trajectory on the right course.
There are a number of terms used interchangeably with an income statement. These include revenue and loss report, earning statement, report of income, and revenue summary.
To know more about how an income statement can spell out profound insights into financial performance and strategy optimisation, reach out to our team.
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Importance of an Income Statement
In the corporate landscape, income statements are prepared at regular intervals, often monthly, quarterly, or annually, for a number of reasons. For example:
Enables Informed Decision-Making: Business owners can read and analyse their income statements to see if any changes are required in their business plan to reach their financial goals most efficiently. This is because an income statement offers insights into the current financial position of the company.
Helps Monitor Profitability: For business stakeholders, an income statement is essential in explaining the organisation’s financial health. It gives stakeholders a clear picture of the business’s profitability and aids in assessing its performance and financial health.
For Regulatory Compliance: Registering and operating a business in a country requires compliance with the country’s regulations and tax code. The income statement offers crucial financial information required for an accurate calculation of the tax burden.
Explore Sleek to discover how precise income statements can be your secret weapon, enabling you to make well-informed decisions, monitor profitability, and ensure seamless regulatory compliance.
Uses of an Income Statement
The fundamental goal of the income statement is to show how profitable and financially stable a business is on a monthly, quarterly, or annual basis. It’s important to note here that while a yearly income statement offers a comprehensive assessment of the overall plan, a monthly or quarterly report allows for more dynamism and agility in decision-making.
It’s imperative to mention here that an income statement can provide invaluable micro-level insights as well, especially when used to ascertain department-wise spending, revenue generation, advertisement needs and so on. Therefore, using this data, important decisions can be made, such as increasing sales efforts, concentrating on new audience groups, or choosing whether to restructure or close departments.
Additionally, research analysts use income statements to compare firms’ performance over certain time periods. Investors assess if the management has been able to keep overhead operational costs under control while increasing productivity.
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Who uses an income statement?
There can be both internal and external stakeholders that can benefit from the use of a business’s income statement. For instance, internally, an owner can figure out if a strategy needs tweaking, a department is bleeding money or if sales have to be boosted, just by analysing his business’s income statement.
Externally, an investor can gauge the feasibility of his investment by gaining insights into the growth and profit potential of a business by pursuing the document, especially in conjunction with a cash flow statement. Additionally, creditors can also assess the borrower’s capacity to repay debts.
On the other hand, competitors can scrutinise income statements to gain insights into market dynamics and competitor performance.
Therefore, it won’t be wrong to say that an income statement is a pivotal document that guides internal strategy and informs external stakeholders.
Not sure how to read a cash flow statement? Fret not, click the link to our article to learn more!
Gain a competitive edge by harnessing the power of income statements. Explore Sleek for comprehensive financial insights.
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Types of Income Statement
There are four types of income statements based on two factors: the reporting needs of an organisation and the complexity of an organisation’s financial data. Here are some common types of income statement formats:
Single-Step Income Statement Format: This is the simplest form and presents revenues and gains separately from expenses and losses. The subtraction of the latter from the former gives the net income. Net income = (Gains+Revenue)-(Loss+Expenses).
Multi-Step Income Statement Format: This format provides a more detailed breakdown of revenues and expenses and includes sections for operating and non-operating revenues and expenses, and calculates net income after deducting all expenses.
It calculates gross profit first by subtracting the cost of goods sold from net sales. Then operating income is calculated by deducting operating expenses from gross profit. Once you deduct the non-operating items from operating income, you get the net income.
Common-Size Income Statement Format: This format expresses each line item as a percentage of total revenue. It is useful for comparing the composition of income and expenses relative to total revenue over time or against industry averages. It also helps compare financials with that of a competitor in an apples-to-apples format as items are expressed in percentages. It also helps identify significant changes in a business’s financials.
Nonprofit Income Statement Format: Nonprofit organizations use a variation of this document called the Statement of Activities. Instead of profit, it shows the change in net assets (revenues, expenses, and gains/losses) to show how assets are allocated to realise organisational goals.
It’s worth noting here, that under Singapore laws, grouping different expenses as one item is considered incorrect. It mandates businesses to list each item separately.
From single-step to nonprofit income statements, Sleek adapts to your reporting needs. Reach out to us now.
How to Make an Income Statement?
There are many income statement templates available online. However, all income statement templates use the following steps in their creation. Please note that most of the time, you have the liberty to tweak your income statement. This applies to the format, not the data.
Step 1: Gather Financial Data
Collect all relevant financial data, including revenue, expenses, gains, and losses, for the period you want to report on. Ensure that the data is accurate and complete.
Step 2: Define the Reporting Period
Determine the time frame for your income statement. Common choices include monthly, quarterly, or annually. Make sure it aligns with your reporting needs.
Step 3: Organise the Format
Choose an appropriate format for your income statement. The most common formats are single-step and multi-step.
Step 4: List Revenues
Start with your revenues. List all sources of income for the chosen period.
Step 5: Calculate Total Revenue
Sum up all the revenues to calculate the total revenue for the period.
Step 6: List Operating Expenses
Enumerate all your operating expenses. These are the costs directly related to your core business activities.
Step 7: Calculate Total Operating Expenses
Add up all the operating expenses to calculate the total operating expenses.
Step 8: Calculate Gross Profit
Subtract the total operating expenses from the total revenue to find the gross profit.
Step 9: List Non-Operating Revenues and Expenses
List any non-operating revenues (e.g., interest income) and expenses (e.g., interest expenses) separately.
Step 10: Calculate Net Profit and loss statement
Subtract the total non-operating expenses from the total non-operating revenues.
Step 11: Review and Verify Data
Double-check all calculations and data to ensure accuracy.
Step 12: Format and Presentation
Organise in a clear and easy-to-understand format.
Step 13: Analysis and Interpretation
Analyse and compare to previous periods, industry averages, or budgeted figures to assess financial health.
Step 14: Distribution
Share the income statement with relevant stakeholders.
Additionally, it’s worth mentioning here that as per Singapore Law, if your revenue is SGD 500,000 or more and you claim capital allowance on your assets (business), you will have to submit a fixed schedule showing details of acquired and disposed of assets in the fiscal year.
What’s the Difference Between a Balance Sheet and an Income Statement?
The primary difference is their purpose. A balance sheet lays out a snapshot of a company’s financial health, usually on an annual basis. It details the company’s assets, liabilities, and shareholders’ equity – showing what it owns and owes.
On the other hand, an income statement expands on revenue, expenses and net income, usually over a month, or a quarter. It focuses on profitability and shows how well the company has performed in that period.
Elevate your financial acumen with Sleek. Learn how balance sheets and income statements reveal different facets of your company’s financial position and how you can use both to optimise your strategy.
A Real Example of an Income Statement
An income statement example, we’d like to share here is that of Amazon‘s from the financial year 2018-2022. We have laid out below a brief explanation of how to analyse it using the Fundamental Analysis Course by CFI:
Income Taxes
Income tax expenses are the applicable taxes on income earned before taxes. This line item accounts for current and future tax liabilities.
Net Income
Net income is a key metric that indicates the profitability of a company after all expenses, including taxes, have been accounted for. It is calculated by subtracting all expenses, including income taxes, from the gross profit. The balance left after these deductions is used for retained earnings after accounting for dividends.
Conclusion
By evaluating key financial metrics, such as revenue trends, cost management, profitability, and tax implications, investors and analysts can gain valuable insights into a company’s financial performance and its potential for future growth.
By taking the Fundamental Analysis Course by CFI, stakeholders and business owners can learn how to read and analyse these financial statements. They can then make informed decisions – be it for investment, strategic planning, or evaluating overall financial health.
Ultimately, a comprehensive understanding of an income statement is a crucial tool for sound financial decision-making in the corporate world.
If you’re unsure about any aspect of your taxes or need assistance with financial tax planning, consulting tax advisors at Sleek will save you time, money, and potential headaches. At Sleek, we provide accounting services to aid you with an efficient and seamless tax process.
With Sleek, you can make better financial decisions. Reach out to us, to evaluate business performance and development prospects.
FAQs
It’s an outline of a business’s revenues and expenses and is essential for business owners. It serves as a foundation for calculating various financial ratios, offering insights into the company’s financial performance.
Its primary purpose is to provide a comprehensive report of a company’s profit and loss for a specific period. It helps businesses assess their financial performance, make informed decisions, and track profitability over time.
To analyse P&L, begin by defining revenue streams and identifying expenses. Then calculate the gross margin by subtracting costs from revenues, followed by calculating operating profits. Compare results to budgets if available and assess year-on-year changes to determine profitability trends.
Master the art of P&L statement analysis with Sleek. Learn how to identify revenues, calculate margins, and assess year-on-year changes for better financial insights.
