The income statement, along with the balance sheet and the cash flow statement, is one of the three basic financial statements, as it is used to show the financial performance of the institution over a specific period of time and is also used by stock investors to analyze profit rates and future growth, as well as several names for future growth,a list of revenues and expenses that focuses mainly on revenues and expenses during a specific period.
Income statement types
The income statement is prepared in two main ways, and the following is a simple explanation for them:
One-step income statement
The one-step income statement is a simplified overview of the company’s revenues and expenses, and only the company’s revenues, expenses, and net income appear in this type, where revenues and profits are calculated at the top of the list and total expenses and losses are calculated at the bottom. This method helps facilitate the process of saving data for accountants and investors. It also helps shareholders to know the net income, which helps them understand the company’s activity. The following equation is used to calculate the net income using this method:
One-step income statement equation
(Profit + Revenue) – (Loss + Expense) = Net Income
Using a one-step income statement
- There are a number of cases in which this type is appropriate, including:
- If you need a simple statement of net income for the business.
- If the work does not contain complex operations.
- If you do not need to separate operating expenses from sales of sales.
multi-step income statement
A multi-step income statement or extended income statement refers to the way each item is described as a percentage of the value of revenue or sales, and this method is used in vertical analysis in which each item in the list is represented as a percentage of the main number within the list, and this helps This is the method for comparing the company’s performance in different periods, and it can also help in comparing the company’s percentages with the competitors’ percentages to know the company’s performance in relation to the industry. Three equations are used in this type to reach the net income:
Multiple step income statement equations
Gross Profit = Net Sales – Cost of Goods Sold (COGS)
Operating Income = Gross Profit – Operating Expenses
Net Income = Operating Income + Non-Operating Income
Using the multi-step income statement
This type of income statement is used in the following cases:
- If you need more detail on your income statement.
- If you need a gross profit report; which is an important measure of the effectiveness of the use of labor and equipment in the production of revenue.
- If you want to report operating income; which shows the effectiveness of the company in making profits from its main activities.
Steps to prepare a multi-step income statement
The main objective of the income statement is to show the institution’s profits or losses that it incurred during a specific period of time. According to the following steps:
- Determining the total revenue: The total revenue is defined as the total sales made during the period specified for the list.
- Determine the total cost of goods sold: This number is calculated by determining the unit cost of products and includes all costs directly related to the production process, such as the costs of purchasing raw materials and direct labor costs.
- Determining the total profit: This is done through the following equation:
Gross Profit = Total Revenue – Cost of Goods Sold. - Determining the value of office expenses: they are expenses that are not related to the production process and include expenses related to management and sales operations such as office rent expenses and wages, sales commissions, electricity and water expenses, and phone bill expenses.
- Depreciation expense account for the company: It is a non-cash account that is treated as a tax shelter and used as a means to reduce taxable income, so it appears in the income statement.
- Determining the value of the operating profit: It is also called the profit before interest and taxes, and it is determined according to the following equation: Operating Profit = Gross Profit – (Operating Expenses + Depreciation Expense)
- Determining the value of profits before tax: it is calculated using the following equation:
Gross profit before tax = operating profit – interest value - Determining the value of profits available to ordinary shareholders: their value is calculated according to the following equation:
Profits available to ordinary shareholders = profit before tax – tax expense - Determining the value of the net profit: where the net profit is defined as the value of the money that remained in the company for reinvestment and is in the form of retained earnings, and it is calculated according to the following equation:
Net Profit = Earnings available to ordinary shareholders – Dividends
Read also: The importance of using the income statement?
