What is the income statement?

The income statement analysis reveals the structure of the company’s revenues and expenses, which allows them to be controlled in terms of items, types (areas) of an activity, product groups, and managers. Thus, the income statement definition is very simple. 

Income statement simple definition

Based on the analysis obtained in the context of various analysts, it is possible to prepare corrective measures to modify the pro forma income statement. For example, you can conclude the feasibility of developing or discontinuing any business lines, changing the product line or implementing KPI. Key Performance Indicators – a key indicator of performance results, the degree of achievement, and the cost of getting results for managers and departments.

Income statement formula

The income statement template includes several important elements:

Revenue – the company’s revenue (shipment) for the period. It is better to divide it into the types/areas of activity or product groups for which you need to control the profit margin.

Direct expenses on the income statement format are expenses that are directly related to the revenue that you specified in revenue. There would be no revenue if there would be no expenses.

Revenue is the price of the sold product/service, i.e., the amount for which you sold the product to the buyer.

Direct costs on the income statement are the cost of the shipped item, i.e., the amount for which you purchased the shipped item from the supplier.

Production expenses are expenses directly related to the production cycle: wages of production personnel, facility rent, production services, and so on. These expenses are considered conditionally fixed. They are in some way dependent on the production volume and revenue, for example, the electricity bill or the wages per unit of work, but for the most part, they are fixed.

General business expenses on the income statement – expenses for servicing your main business: accounting, financial services, marketing services, and managers’ salaries, HR services are fixed expenses that do not depend on the amount of revenue.

Expenses for financial activities on the income statement are expenses for attracting borrowed capital. 

Tip: In the common size income statement, include only those expenses that you can calculate using the direct method – materials, wages, and services.

Income statement example

If we take any practical income statement example, we will see that the income statement also allows you to perform a vital function for any company – cost management. Analyzing the context of cost items makes it possible to assign costs to “important” or not “important” by their share in the total cost, as well as to “managed “or “not managed,” if possible, to influence their level. “Important “and “managed ” costs on the income statement have a key impact on the level of the company’s financial result. Thus, it is imperative to define such items for subsequent systematic control over the dynamics for the periods and in the context of cost items to further optimize (reduce) them. For example, material costs often have a large share of the total cost, and the “material costs” item is, in most cases a “managed” item. Manageability is due to the ability to set and control consumption rates and limits on materials. Now you know what goes on an income statement.

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