The income statement is one of the three most important financial statements for companies of all kinds, as all companies must prepare the balance sheet and the cash flow statement along with the income statement, which reflects both earned income and expenses paid by companies from net profit or loss during a period.
Certain financial measures, and the income statement can be considered one of them, indicate the company’s performance during this period, including the volume of its sales and its profits, and the income statement represents the cornerstone for all companies that study their situation to make fateful decisions such as those related to business development or expansion, as it helps them to monitor the head of the cash flow in the company, which is the main artery of the life of all companies, and the income statement are included among the important papers that must be presented to the securities, tax, and stock exchange committees in case they are needed to assess the company’s situation and understand the extent of its financial health, and the tax authority relies on what has been documented in This list is to determine the taxes that will be imposed on the company by also looking at tax returns and other financial statements.
What does the income statement include?
The income statement is one of the most important tools that helps measure the company’s performance level and determines the amount of profits or revenues that companies receive during certain periods. External ones, such as investors interested in the efficiency of business processes in companies and studying their financial situation before beginning to deal with them, and in order for the income statement to clarify all of these matters, it must contain a set of data and indicators that lead to giving the final data, and the following is an explanation of the basic aspects that are included in the income statement:
Revenue or sales
Revenues represent the first section of the income statement, as this section provides a summary of the total sales made by the company during a specific financial period, and the revenues achieved by the company can be classified into two types, namely:
Operating revenue
It refers to the revenues that the company has achieved through its basic activities, such as manufacturing the product or providing the service.
Non-operating revenue
This type refers to the gains that companies achieve through non-core activities such as maintenance, installation, operation, and so on.
Cost of goods sold
The cost of goods sold is the total cost of sales or services provided by the company, and it can be defined as the expenses incurred by companies to manufacture products and provide services; it includes only the costs of manufacturing the products that the company sells and does not include other expenses such as overheads and others.
Gross profit
The concept of gross profit refers to the net proceeds obtained from sales revenue minus the total cost of goods sold in the same period of time, and the total cost of goods sold is what the company pays for the production and manufacture of products, as previously explained.
Gains
The concept of “gains” indicates the amounts that the company reaps as a result of an event that led to an increase in its income, and these gains refer to the amount of money that the company obtained for various commercial activities, such as selling in the operating sector, and profits obtained through non-commercial activities are also included. For one time, it is possible to distinguish between revenues and gains by considering the revenues that companies obtain on a regular and periodic basis, whereas the gains accrue to the company with benefits that are considered rare to occur for one time or more.
Expenses
Expenses are represented in all that companies pay in order to obtain revenues, as follows:
- Staff wages.
- Supplier Payments.
- Equipment depreciation expenses.
As is the case with revenues, expenses are divided into two main parts:
Operating expenses
They are expenses paid on basic business activities.
Non-operating expenses
Refers to everything that is paid on other activities, such as sales commissions, contributions to pensions, and so on.
Depreciation
The concept of depreciation refers to the distribution of the cost of a long-term asset over its life, and it may be considered a non-cash transaction used to write off assets and the ability to dispose of them in the event that they become obsolete.
Advertising and administrative expenses
Advertising expenses refer to everything that is paid on marketing operations required to expand the customer base, while administrative expenses refer to what the company’s management spends itself and incurs as a whole, which are expenses that exist permanently regardless of the volume of sales.
Earnings before taxes
It represents the value of profits achieved by companies by subtracting expenses from the income they obtained before deducting the tax value, and it is a measure of the company’s financial performance.
Net income
Net income can be defined as the amount that a company earns after deducting expenses from the total revenue, as net income is the final value of the profits earned for the company.
Read also: What is the beginning stock in the income statement?
