Income Statement Analysis: How to Read an Income Statement

All of these titles are meant to reflect the sales generated by selling product to customers in the day-to-day business. On Clear Lake’s income statement in Figure 5.2, we see its top line referred to as Sales. It’s important to note that there are several different types of income statements that are created for different reasons. For example, the year-end statement that is prepared annually for stockholders and potential investors doesn’t do much good for management while they are trying to run the company throughout the year. Thus, interim financial statements are prepared for management to check the status of operations during the year.

The likelihood of a recurring gain or loss from a particular type of event depends on the plans and decisions made by management. On the other hand, a firm’s history and management policies affect its environment. The authors interpret this opinion to indicate that the accountant must consider the external and internal environments of the firm.

Revenue Section

These two metrics serve as effective tools for tracking a company’s profitability from different vantage points. Pre-tax income offers a view of operating performance without the noise of regional taxation, while net income includes all factors for a comprehensive view of actual profitability. When read together as part of an income statement, they provide a fuller picture of a firm’s financial health. Next, $560.4 million in selling and operating expenses and $293.7 million in general administrative expenses were subtracted. To this, additional gains were added and losses subtracted, including $257.6 million in income tax.

While the multi-step income statement formula is more complex, the final value provides more detailed information about a company’s financial situation. An income statement tells you whether or not a company made a profit or loss during the reporting period. It’s sometimes referred to simply as the profit and loss statement, or just “P & L.” This statement is a great place to begin a financial model, as it requires the least amount of information from the balance sheet and cash flow statement. Thus, in terms of information, the income statement is a predecessor to the other two core statements. In the below example, the format selected by McDonald’s Corporation illustrates a single-step income statement with separately reported income taxes.

Using Income Statements for Financial Analysis

It also shows whether a company is making profit or loss for a given period. The income statement, along with balance sheet and cash flow statement, helps you understand the financial health of your business. Multi-step income statement – the multi-step statement separates expense accounts into more relevant and usable accounts the focus of an income statement is on based on their function. Cost of goods sold, operating and non-operating expenses are separated out and used to calculate gross profit, operating income, and net income. With this type of analysis, you would find income statement metrics for similar companies within the industry and compare them to one another.

Your reporting period is the specific timeframe the income statement covers. Revenue realized through primary activities is often referred to as operating revenue. For a company manufacturing a product, or for a wholesaler, distributor, or retailer involved in the business of selling that product, the revenue from primary activities refers to revenue achieved from the sale of the product. Similarly, for a company (or its franchisees) in the business of offering services, revenue from primary activities refers to the revenue or fees earned in exchange for offering those services. This includes federal, state, and local taxes, as well as any payroll taxes.