An income statement is a report showing an entity's performance. It is a summary of recording the daily transactions of the business or the summary of the records done in bookkeeping. It shows the amount of sales or revenues a company had, the expenses it incurred and finally, its net income. It shows many figures, but these are not just figures that are to be taken for granted. They are to be examined comprehensively by persons interested or involved in the business. It is important that stakeholders should know how to read an income statement to be able to evaluate a company's condition. There are different ways on how an income statement is presented. It is depending on what type of business it is into. It depends if it is in merchandising, service or manufacturing.
Reading an income statement is quite easy. The uppermost part of it obviously shows the name of the company and to what period the report is covered. The first title that is shown on the meat part of the report for a merchandising company is gross sales, (It is called revenues if it is a service type). It shows the cash inflows of the company. It is to be deducted by sales discounts, returns, and allowances to arrive at net sales. To get for the gross profit, direct cost attributable to the goods produced or sold, which is named as cost of sales or cost of goods sold, is to be deducted from net sales.
In the expense sections, which are cash outflows or other costs that reduce the income of a company, shows account titles like depreciation, allowance for bad debts, selling and administrative expenses. Selling expenses are expenses needed to sell products or merchandise, while administrative expenses represent the cost of managing the business. Depreciation expense is the expense in the decline in the value of assets with respect to their useful lives. Allowances for bad debts are estimations of the uncollectible portion of the receivables. Another account, if deductible, is called finance cost or interest expense, and if not deductible but forms part in increasing income, it is called interest income. These expenses are grossed up and are deducted to net sales. The resulting figure would then be net income before tax or net profit before tax. After deducting taxes, net income or net profit would be the final result or the last figure.
Now that it has been demonstrated how to read an income statement, it now proves that reading income statements is quite easy. It is relieving to know that it is only a summary report of the day-to-day transactions of bookkeeping, which means that, we will no longer need to go over every single transaction to know the performance of a company. However, let us put in mind that this report cannot be made without those detailed records done in bookkeeping.
Reading an income statement is quite easy. The uppermost part of it obviously shows the name of the company and to what period the report is covered. The first title that is shown on the meat part of the report for a merchandising company is gross sales, (It is called revenues if it is a service type). It shows the cash inflows of the company. It is to be deducted by sales discounts, returns, and allowances to arrive at net sales. To get for the gross profit, direct cost attributable to the goods produced or sold, which is named as cost of sales or cost of goods sold, is to be deducted from net sales.
In the expense sections, which are cash outflows or other costs that reduce the income of a company, shows account titles like depreciation, allowance for bad debts, selling and administrative expenses. Selling expenses are expenses needed to sell products or merchandise, while administrative expenses represent the cost of managing the business. Depreciation expense is the expense in the decline in the value of assets with respect to their useful lives. Allowances for bad debts are estimations of the uncollectible portion of the receivables. Another account, if deductible, is called finance cost or interest expense, and if not deductible but forms part in increasing income, it is called interest income. These expenses are grossed up and are deducted to net sales. The resulting figure would then be net income before tax or net profit before tax. After deducting taxes, net income or net profit would be the final result or the last figure.
Now that it has been demonstrated how to read an income statement, it now proves that reading income statements is quite easy. It is relieving to know that it is only a summary report of the day-to-day transactions of bookkeeping, which means that, we will no longer need to go over every single transaction to know the performance of a company. However, let us put in mind that this report cannot be made without those detailed records done in bookkeeping.
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