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Income Statement

Income Statement

Author: Evan McLaughlin

Identify key characteristics of income statements.

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[MUSIC PLAYING] Hey, everyone, and welcome our video today on the Income Statement. So what are we covering today? Well, today is all about the Income Statement.

We're going to talk about what is the Income Statement. We're going to compare the income statement to the Balance Sheet. And then we're going to finish up with discussing the two types of Income Statements and then two examples.

So let's get started. Let's talk about the Income Statement, but let's take a step back. What are financial statements? Those are reports providing financial information about a business at a given time.

So then what is the Income Statement? It's a financial statement that provides information about the revenue, expenses, and net profit or loss of a business for a given time period. That's important, "a given time period." So let's break down that net profit or loss idea.

So the Income Statement helps us identify the business profitability. That's a key component of what we use the Income Statement for. And that's one year or less, so the Income Statement either reports on one year or less of a time period. And it also helps us assess the health or strength of a business, which is important information for shareholders, potential investors, as well as banks.

So now, what is the Income Statement formula? Well, the Income Statement formula is revenues minus expenses equals net income. Revenues being our inflows from our business operations, and expenses being the outflows or the use of assets from our business operations.

So that's the Income Statement. Now let's compare the Income Statement to our Balance Sheet, starting with reporting. So how is the Income Statement and the Balance Sheet related when it comes to reporting?

Well, the Income Statement, as we mentioned earlier, reports for a period of time. So it covers a period of time. It's activity based. Whereas, the Balance Sheet covers reports at a point in time. So the Balance Sheet is a point in time. And the Income Statement covers for a period of time. It's activity based.

Now let's look at the accounts that are included in each of these. In the Income Statement, it's going to be our temporary accounts, our revenues and our expenses. Whereas, the Balance Sheet, it's assets, liabilities, and equity, or what we call our permanent accounts. And again, the Balance Sheet reports balances. And the Income Statement reports activity.

And lastly, a decision tool. So the Income Statement helps us assess past performance and predict what's going to happen in the future. And the Balance Sheet is primarily forward looking. So it helps us identify our position, as of a certain date, and what the implications are going forward. So there's a little bit of difference there, but there's also some similarities.

So now, let's look at the types of Income Statements. There are two types of Income Statement formats. We have single step and multi-step.

So let's look at single step first. Well, why is it called single step? Well, just like the Income Statement formula, revenues minus expenses is net income. That's what the Income Statement is going to look like. There's only one step. You take your revenues, subtract out your expenses. That's your net income. And that's what your statement looks like.

Now if we go into multi-step, why is it called that? Well, we start with our sales. And then we would subtract out cost of goods sold-- that's our first step-- to get our gross profit.

And then we would take that gross profit, subtract out all of our operating expenses from our business operations-- that's our second step-- to get to income from operations. And then, once we have income from operations, we subtract out other revenues and expenses-- that's our third step-- to ultimately get to our net income.

So at the end of the day, the single step and multi-step get to the same place, but the multi-step has these individual steps where you're calculating gross profit and separating out income from operations, as well as other revenues and expenses. So it includes a separate gross profit and operating income.

So now, let's look at our examples. We're going to look at the single step income statement. So our first example, Example A, single step income statement. We're going to start with the header.

So what does our header look like? Well, it's going to have the name of our company. It's going to say Income Statement. And it's also going to say "For the period ending" blank. And in this case, it's December 31, 2012.

So it's very important it has the words in there, "For period ending." That indicates that the Income Statement is reporting on activity for a given period.

Next is going to come our revenues. So we're going to have sales. We might have some other revenue, so interest revenue. So that's our total revenue for our single step total revenues.

And then we're going to look at our expenses. So then we're going to detail our expenses. In this case, we have some selling expense, rent expense, marketing expense, interest expense. And then we have our total expenses.

So you'll see here, we have total revenue, total expenses. And then we can put in our net income. So total revenue, 310,000, minus total expenses, 175,000, gives us a net income of 135,000.

Now the other piece of information that's contained on this single step income statement is our earnings per share. So we take that net income and divide it by the number of shares that are owned and issued by the company. If this was a publicly traded company and they had shares on an exchange, we would list the earnings per share. In this case, we assumed there were 100,000 shares, so our earnings per share were $1.35 per share. So that's our first example.

Let's look at one more example of our single step income statement. It's very similar. Again, we still have the same header, company name, Income Statement For the period ending-- in this case, December 31, 2012. For the period ending is very important.

We detail our revenues. In this case, we have service revenue and interest revenue. And then we detail all of our expenses. It might be a little bit different, salaries, rent. In this case, we have software and income tax.

So then we have our total expenses. So we're still showing total revenue, total expenses. And then we can calculate our net income. And then, in addition to net income, at the bottom of the statement, we also include this earnings per share figure, which, in this case, is $1.05 per share, assuming we had 200,000 shares outstanding.

OK, so those are our two examples of single step income statements. So let's summarize. In a nutshell, what did we talk about today?

Well, today was all about the Income Statement. And just to refresh, the income statement is a financial statement that provides information about the revenue, expenses, and net profit or loss of a business for a given time period. Those words at the end are very important, "for a given time period." Remember, the income statement is activity based.

We looked at the single step and the multi-step. But we focused today, when we looked at our examples, on the single step income statement, total revenues minus total expenses equals our net income. I hope everybody enjoyed this video. And I hope to see you next time.

Terms to Know
Financial Statements

Reports providing financial information about a business at a given time.

Income statement

A financial statement that provides information about the revenue, expenses, and net profit or loss of a business for a given time period.