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5 Facts about the Income Statement

If you've ever heard the phrase, "What's the bottom line?", then you know what an Income Statement is. The "bottom-line" everyone is referring to is the last number at the very bottom of the statement under the last (or "bottom") line called Net Income (also know as Net Profit). Here are 5 other facts you may or may not have known about the Income Statement.

1. The Income shows transactions for a period of time.

The Income Statement is not cumulative like the "as of" a date on the Balance Sheet. So the Income Statement excludes any transactions not in the date range. An Income Statement can reflect transactions for a single day, month, quarter, year, or more.

2. The Income Statement can be either cash or accrual.

For analysis, we prefer an Income Statement to be accrual-based. Accrual matches the expenses for a period with the revenue generated during that same period. Let's say your sales force earns commissions and had a record breaking month. You would want to see those commission paychecks as an expense in the same period as the revenues they generated. This will give you an idea of how profitable your sales force is. In a cash based accounting, those commission paychecks would be on a later income statement when they were actually paid. For a refresher on cash vs. accrual based accounting, refer to our Cash vs. Accrual Accounting article.

3. The Income Statement shows only Income and Expenses.

The Income Statement does NOT show any asset, liability, or equity transactions. So the chunk of change that went to pay off the business AMEX will not reflect as an expense, nor will the money you lended the company from your checking account show as income. If you want to see how these trasactions affect your business, look to the Cash Flow Statement.

4. There are normally 3 parts to a small business Income Statement

These are Revenue, Cost of Goods Sold, and Expenses:

  • Revenue is the income derived from normal business operations. If your business wins a contest and is awarded a $50 prize, that is considered Other Income, not revenue because it is not part of your normal business operations.

  • Cost of Goods Sold (often referred to as COGS) is the cost to acquire the product(s) you are selling. If you are in manufacturing, this would be all the costs required to produce assemble the final product that was sold in the period. If you are in retail, this can be the cost you paid a wholesaler to acquire the product(s) that sold in the period. If you are a strictly service-based business, then you will not have a COGS item.

  • Expenses are the normal operating costs for running your business. If you are fined for not having the correct permits in your location, that is considered Other Expenses, because incurring fines is not an expense that helps you generate revenue (I hope!).

5. It's not always about the bottom line

While the Income Statement is excellent for seeing at a glance whether or not your business is profitable, a deeper analysis can reveal so much more, like how different business units or products are performing, or whether your seasonal business should be a full-year business. The good news, analysis doesn't require much more than 5th grade math skills. If you want to know more, check out our article on Ratio Analysis - Profitability.

#FinancialAnalysis #IncomeStatement

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