How to Prepare an Income Statement | HBS Online

When it comes to fiscal statements, each communicates particular information and is needed in different context to understand a company ’ s fiscal health .
The income statement is one of the most important fiscal statements because it details a company ’ mho income and expenses over a specific menstruation. This document communicates a wealth of information to those reading it—from key executives and stakeholders to investors and employees. Being able to read an income affirmation is authoritative, but knowing how to generate one is just a critical .
here ’ s an overview of the information found in an income affirmation, along with a bit-by-bit expect at the process of preparing one for your arrangement .
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What Is an Income Statement?

An income statement is a fiscal report detailing a company ’ sulfur income and expenses over a report menstruation. It can besides be referred to as a net income and loss ( P & L ) affirmation and is typically disposed quarterly or per annum .
income statements depict a company ’ s fiscal performance over a report period. Because the income affirmation details revenues and expenses, it provides a glance into which business activities brought in tax income and which cost the organization money—information investors can use to understand its health and executives can use to find areas for improvement .
Related: How to Read & Understand an Income argument
An income statement typically includes the follow information :

  • Revenue: How much money a business took in during a reporting period
  • Expenses: How much money a business spent during a reporting period
  • Costs of goods sold (COGS): The total costs associated with component parts of whatever product or service a company makes and sells
  • Gross profit: Revenue minus costs of goods sold
  • Operating income: Gross profit minus operating expenses
  • Income before taxes: Operating income minus non-operating expenses
  • Net income: Income before taxes
  • Earnings per share (EPS): Net income divided by the total number of outstanding shares
  • Depreciation: Value lost by assets, such as inventory, equipment, and property, over time
  • EBITDA: Earnings before interest, depreciation, taxes, and amortization

Related: 13 Financial Performance Measures Managers Should Monitor

Steps to Prepare an Income Statement

1. Choose Your Reporting Period

Your report period is the specific timeframe the income statement covers. Choosing the correct one is critical .
monthly, quarterly, and annual report periods are all common. Which coverage menstruation is right for you depends on your goals. A monthly report, for exercise, details a shorter menstruation, making it easier to apply tactical adjustments that affect the next calendar month ’ second business activities. A quarterly or annual report, on the other hand, provides analysis from a higher grade, which can help identify trends over the hanker term .

2. Calculate Total Revenue

once you know the report period, calculate the total tax income your commercial enterprise generated during it .
If you prepare the income statement for your stallion organization, this should include gross from all lines of business. If you prepare the income statement for a particular business trace or segment, you should limit gross to products or services that capitulation under that umbrella .

3. Calculate Cost of Goods Sold (COGS)

next, calculate the sum cost of goods sold for any product or service that generated tax income for your clientele during the report time period. This encompasses conduct and indirect costs of producing and selling products or services, including :

  • Direct labor expenses
  • Material expenses
  • Parts or component expenses
  • Distribution costs
  • Any expense directly tied to the production of your product or service

4. Calculate Gross Profit

The next gradation is to determine gross profit for the report period. To calculate this, simply subtract the cost of goods sold from gross .

5. Calculate Operating Expenses

once you know gross net income, forecast operate expenses ( OPEX ).

operate expenses are collateral costs associated with doing business. These differ from cost of goods sold because they ’ ra not directly associated with the process of producing or distributing products or services. Examples of expenses that fall under the OPEX category include :

  • Rent
  • Utilities
  • Overhead
  • Office supplies
  • Legal fees

6. Calculate Income

To calculate total income, subtract operating expenses from gross profit. This numeral is basically the pre-tax income your business generated during the report period. This can besides be referred to as earnings before concern and taxes ( EBIT ) .

7. Calculate Interest and Taxes

After calculating income for the report period, determine sake and tax charges .
sake refers to any charges your caller must pay on the debt it owes. To calculate interest charges, you must first understand how much money you owe and the concern rate being charged. Accounting software much automatically calculates sake charges for the report period .
following, calculate your sum tax effect for the report time period. This includes local, submit, and federal taxes, a well as any payroll taxes .

8. Calculate Net Income

The final step is to calculate net income for the report menstruation. To do this, subtract interest and then taxes from your EBIT. The act remaining reflects your commercial enterprise ’ s available funds, which can be used for respective purposes, such as being added to a reserve, distributed to shareholders, utilized for inquiry and development, or to fuel business expansion .

Income Statement Example

Below is an example income instruction for a fictional party. As you can see at the circus tent, the report period is for the year that ended on Sept. 28, 2019 .
Sample Income Statement, followed by a link to an alternative version
Go to the alternative version .
During the report period, the company made approximately $ 4.4 billion in entire sales. It cost the business approximately $ 2.7 billion to achieve those sales. As a solution, gross profit was about $ 1.6 billion .
next, $ 560.4 million in selling and manoeuver expenses and $ 293.7 million in general administrative expenses were subtracted. This left the caller with an operating income of $ 765.2 million. To this, extra gains were added and losses subtracted, including $ 257.6 million in income tax .
At the bottom of the income instruction, it ’ sulfur clear the business realized a net income of $ 483.2 million during the report period .

A Critical Skill for Business Leaders

Although the income instruction is typically generated by a member of the account department at large organizations, knowing how to compile one is beneficial to a range of professionals .
Whether you ’ re an individual contributor, a member of the leadership team in a non-accounting function, or an entrepreneur who wears many hats, learning how to create an income statement can provide a deeper sympathy of the fiscal metrics that matter to your business. It can besides help improve your fiscal analysis capabilities .
Do you want to take your career to the next level? Consider enrolling in Financial Accounting—one of three courses comprising our Credential of Readiness (CORe) program—which can teach you the key financial topics you need to understand business performance and potential.

Data Tables

Company B Income Statement

For Year Ended September 28, 2019 ( In thousands )

Activity Amount
Net Sales 4,358,100
Cost of Sales 2,738,714
Gross Profit 1,619,386
Selling and Operating Expenses 560,430
General and Administrative Expenses 293,729
 Total Operating Expenses 854,159
Operating Income 765,227
Other Income 960
Gain (Loss) on Financial Instruments 5,513
(Loss) Gain on Foreign Currency (12,649)
Interest Expense (18,177)
Income Before Taxes 740,874
Income Tax Expense 257,642
Net Income 483,232

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