The Income Statement
The income statement is a vital report tat every business owner should use and understand. This short video explains it with an example to make it clearer. This will enhance your knowledge of what they are and how to use them.
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What are they?
An income statement is, at the basic building blocks, a list of all income and expenses for an entity for a given period.
This report is for a period which means it has a start date and a finish date. The period can be any period from a specific day to a financial year and every combination in between.
Common periods for an income statement:
- 12 months (normally a financial year).
- Quarterly
- Monthly
What is included?
As stated above, it is all the income and expenses included in it. These are only for the period specified.
Why use it?
This report has many metrics for an entity to look at:
- All the totals eg: sales, expenses etc
- Gross profit
- Sales less cost of sales.
- This is important in the manufacturing sector specifically.
- Nett profit / Loss
- Gross profit less expenses
- This is what is the most viewed amount
- It is a figure that is BEFORE tax
- Comparisons
- The amounts are often put against the same period last year or another period
- Caution must be used here that you are comparing the “same” figures in different periods.
- ALWAYS “compare apples with apples”
Budgets
A common use for the report is to compare them to and prepare budgets from them. This would be down, typically, over a full year with a monthly breakdown throughout the period in question. This will highlight the trends in that period.
A typical trend would be (for certain industries) to have a decrease in sales in December and January. This would have to be taken into account when budgeting. This is where caution must be used to ensure the apples are being used to produce apples for te next year or period.
An income statement is a useful and even vital report to used by all entities to monitor the performance of that entity.