What It Is:
The income statement is one of the three primary financial statements used to assess a company’s performance and financial position (the two others being the balance sheet and the cash flow statement). The income statement summarizes the revenues and expenses generated by the company over the entire reporting period.
How It Works/Example:
The basic equation on which an income statement is based is:
– Expenses =
All companies need to generate debt and owed to the government. After the costs of doing business are paid, the amount left over is called net income. Net income is theoretically available to shareholders, though instead of paying out dividends, the firm's management often chooses to retain earnings for future in the business.to stay in business. are used to pay expenses, interest payments on
Income statements are all organized the same way, regardless of industry. The basic outline is shown in the following example:
Income Statement for Company XYZ, Inc.
for the year ended December 31, 2008
Cost of Goods Sold ($ 20,000)
Gross Profit $ 80,000
Interest Expense ($ 10,000)
Earnings before tax (EBT) $ 40,000
Net Income $ 30,000
Number of Shares Outstanding 30,000
Earnings Per Share (EPS) $1.00
[InvestingAnswers Feature: Financial Statement Analysis For Beginners]
Why It Matters:
Anyone interested in active investing, picking or investigating the financial health of a company must know how to read , including the income statement. The importance of the information contained in the income statement cannot be overemphasized.
A firm's ability or inability to generate term is the key driver of and prices. Operating profit (EBIT) is the source of debt repayment, and if a company can't generate enough EBIT to pay its debt obligations, it have to enter bankruptcy or sell itself. is the source of compensation to shareholders (owners of the company), and if a company cannot generate enough to compensate owners for the risks they've taken, the value of the owners' plummet. Conversely, if a company is healthy and growing, higher and prices reflect the increased availability of .over the long
Pleasethat earnings/net income/ are not the same as or . It is possible for a firm to be profitable on the income statement, but not be generating , and vice versa. To see a company's , you need to examine its statement of