The income statement is one of the fundamental accounting documents that reflect the financial position of an organization or business. Whether in an annual, quarterly or monthly reports, managers can assess the profit or loss of their operations through the income statement.
The development of this financial statement is straightforward, but its analysis requires some accounting knowledge to identify information that will improve revenues and reduce costs in future years.
The income statement, also known as the profit and loss statement, is a summary accounting document that is used to define the profitability of a company over a given period. It includes revenues and expenses and the difference between the two to determine whether the company is profitable or not.
Revenues and expenses can be related to the operating and non-operating activities of the business. The income statement is aligned with the statement of financial position (balance sheet) and the statement of cash flows to provide a comprehensive view and analysis of financial performance in the short, medium and long term.
What is a compilation engagement?
The preparation of an income statement is essential for managers, investors and creditors.
Investors and shareholders:
Have a CPA prepare your income statement
To develop an income statement, you need to have a set of information about the revenues and expenses of your business:
The content of the income statement may vary from company to company, depending on the activities carried out, the size of the company and the accountant's choice of presentation. For example, some companies break down their operating expenses into several sections, while others present these expenses in a single line. The following is a fictitious example of an income statement:
Company: La soupe du chef
Statements of Operations for the period January 1st to December 31st 20XX (in thousands of dollars)
In order to extract the financial information needed to adjust the company's financial plan, it is wise to know the definition of some terms used in the income statement.
Operating expenses = general expenses + selling expenses + administrative expenses
(Net earnings - Preferred share dividends) / number of common shares outstanding
After producing the income statement, you need to know how to analyze the profitability of the business. To do this, you need to familiarize yourself with the various indicators presented and deduce other useful ratios to better understand the financial situation of your business.
Difference between compilation engagement, review engagement and audit
The break-even point is the minimum number of sales at which the result becomes positive. The break-even point is obtained by dividing the indirect costs by the gross margin (in %).
Gross margin = (gross margin/goods sales) x 100
Example of break-even calculation:
Suppose a company sells a product for $ 25. Its gross margin is 40% and its overhead costs are worth $ 30,000.
In money, the break-even point is:
30 000 $ / 40% = 75 000$
The company must achieve this turnover to reach its break-even point.
In units, the break-even point is:
75,000 / $ 25 = 3000 units In other words, the company needs to sell 3000 units to break even.
By analyzing the income statement, we can deduce important indicators that tell us about the different financial aspects of the company. Here are some of them:
1. A profitable business is not necessarily a business that makes money
It is common for start-ups and fast-growing companies to have low or even negative net profits. This does not imply that the business is loss-making, but is explained by the high level of investment in assets (equipment, buildings, inventory, accounts receivable) to meet the needs of the growing production.
2. A loss-making company is not necessarily a company that is short of money
A loss-making company does not mean that it does not have enough money. The losses incurred can be largely covered by the investment capital needed to continue the business.
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