The Income Statement shows the revenues, expenses, and profits (or losses) of an entity over a period of time (usually quarterly or annually). In other words it is a statement of financial performance for a specified period of time.
Components of Income Statement
What are Revenues?
Revenue is the money an entity receives from the sale of goods, services provided, fees, or interest. Other terms frequently used for revenues are sales, net sales, or sales revenue. It is also referred to as the “top line” because revenues are reported at the top of the income statement.
What are Expenses?
Expenses are the money an entity expends to create revenue and/or operate the entity. Expenses would include cash items such as cost of goods sold, salaries, wages, rents, utilities, interest, etc., and non-cash items such as depreciation. When an entity purchases a capital asset such as a building or equipment they expense a portion of the asset over a number of years; this is called depreciation.
What are Profits?
Revenues – Expenses = Profits (or Losses)
Revenues minus Expenses, equals Profits or Losses. Profits are the amount of money left after the expenses are subtracted from the revenues. Profits are also referred to as net income or the “bottom line” because profits are reported at the bottom of the income statement.
Explain Income Statement
The purpose of the income statement is to show the reader the earnings of the entity. The income statement provides an analyst important information on the financial performance of the entity over a specific period of time. It is also referred to as a profit and loss statement or earnings statement.
The Income Statement is one of three important financial statements and its’ analysis should be a part of value investing and fundamental stock analysis. The other two important financial statements are the Balance Sheet and the Cash Flow Statement.
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| AAAMP Blog by Ken Faulkenberry | |
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Ken Faulkenberry earned an MBA from the University of Southern California (USC) Marshall School of Business with an emphasis in investments. Ken has 25 years of investment experience and is dedicated to helping people with self-directed investment management through the Arbor Investment Planner. His asset allocation strategies have an outstanding performance record. |
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