Income Statement Example

Income statements are one of the primary tools that every business uses in order to share their bottom line with the public and analyze it for themselves. Whether you own a small business or are analyzing income statements for your investment portfolio, it's important to have a good grasp of what they are supposed to accomplish.

The statement is separated into two basic sections: Income and expenses. At the bottom, they will give the total net earnings for the year. Income statements are all about transparency and readability, and they're not as complex as you might think.

Income Statement Example

In this example, we'll prepare an income statement for a service business with moderate overhead and a couple of employees.
Retail income statements are more complicated, because they have to account for items in stock but not yet sold, but they follow the same basic principle.

ABC Company Income Statement

For the quarter ending March 31st, 2015

REVENUES

Net Sales............................................$67,000

Finance Charges.................................$3,000

Total Revenues....................................$70,000

COST OF SALES

Total Cost of Sales...............................$500.00

Gross Profit.........................................$69,500

EXPENSES

Payroll................................................$22,000

Advertising..........................................$8,000

Insurance............................................$400

Total Expenses....................................$30,400

NET INCOME............................................$39,100

Reading an Income Statement

Starting from the top, you'll notice that the company's name comes first, followed by the quarter that the income statement was prepared for. In our income statement example, we're looking at the period encompassing Q1 2015 for ABC Company.

Following that basic information, we begin by listing revenues. This can be anything from sales to interest, as long as it's money coming into the company that quarter. In our income statement example we have two forms of revenue. The first is net sales, and the second is finance charges that we've billed out customers for, likely for financing terms. Some revenue sheets will be much longer and more complex than the one in our income statement example, but at the end of the day every revenue stream will be listed.

The next section is cost of sales, which are any costs incurred during the closing of a deal. In our example, we've wined and dined a few customers in order to get their business, and so it cost us $500 to make a revenue of $70,000.

The final section before net income is the real expenses incurred during the quarter. This can be everything from payroll to vehicle costs, but we've kept things simple in our income statement example. We have money going out for payroll, insurance, and advertising. After listing all of the expenses, we tally them up in an item called Total Expenses.

The last line item is net income, which is just the gross profit minus total expenses.

Organization, Readability, and Simplicity

You can see from the above example that a premium is placed on organization and readability when you look at an income statement. All of the income and expenses are listed plainly, along with subtotals to make the whole thing easier to read. Income statements don't have to be complicated to be effective, and in fact some of the largest companies have easy to read income statements. That's one of the reasons that they're such an important tool for investors, they lay the facts bare with a minimum of jargon and complexity.
By Aaron Phillips
Aaron Phillips is a financial researcher and journalist based out of Michigan. He regularly writes the IG Daily and IG Weekly columns.

Copyrighted 2016. Content published with author's permission.

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