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What is the 'Income Statement'?

The Income Statement makes up part of a company’s financial statements, and is used to report the financial performance of a company over a specified accounting period. Their financial performance is assessed via a summary of how the business incurs its expenses and revenues through both non-operating and operating activities. As well as this, it shows the net profit or less that has been incurred over a specified accounting period.

The Income Statement can also be referred to as the statement of revenue and expense or the profit and loss statement. In the 10-K and the annual report, the Income Statement is one of three main financial statements. All public companies have an obligation to submit these documents to the investor public and the SEC. The other two financial statements that go alongside the Income Statement are known as the Statement of Cash Flows and the Balance Sheet. All three have the power to provide investors with sufficient information about the financial affairs of the company and whether they are in a good or a bad state. However, the Income Statement is the only document that can provide an overview of net income and company sales.

Operating and Non-Operating Expenses

The balance sheet covers one particular moment in time, however the income statement will provide information regarding performance relating to a certain time period. It starts with sales and works its way down to EPS and net income. It is divided into two parts: non-operating and operating. The non-operating section provides information regarding revenue and expenses related to activities not directly tied to the regular operations of the company. The operating section, on the other hand, provides information relating to revenues and expenses that are directly related to everyday business operations. For example, if a Sports company makes sports equipment, the money made from sale of the sports equipment will be on this section. If the sports business sells investment securities, then the money made from these will be listed in the non-operating section.

Uses of the Income Statement

Data from the Income Statement is used by analysts to work out financial ratios, e.g. return on asset and return on equity, operating profit, gross profit, earnings before interest taxes and amortization, and earnings before interest and taxes. Usually, the Income Statement is presented in a common-sized format which is able to provide each item as a percentage of sales. Because of this, analysts are able to see what expenses the largest portion of sales are made up of. The Income Statement is also used by analysts to compare performance over years and over quarters. This works because the statement usually provides two or three years for comparison of historical data.

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