The income statement shows gross profits and net profits.
The income statement is a report that expresses what the income and expenses of a company were in a certain period . This is a document that reflects the economic and financial situation of the organization.
It can be indicated that an income statement exposes, in detail and in an orderly manner, how the development of the exercise turned out in a semester, a year or another period. What it does is show the profitability that was obtained in said stage.
What is the income statement
The income statement is part of the set of reports known as financial statements , which transmit information about the economic situation of an organization. These records collect data linked to the commercial and operational activity of the entity, displaying its results in monetary terms.
The preparation of the income statement is part of the tasks of accounting , which is the discipline dedicated to the study of assets. This financial analysis is useful for shareholders, investors and managers, in addition to serving for the preparation of an audit report.
It is important to mention that, as with the balance sheet and the report , the preparation of the income statement is mandatory. Companies must break down their income and expenses into different categories in order to calculate the result, both before and after paying taxes.
International Financial Reporting Standards (IFRS) and Generally Accepted Accounting Principles (GAAP) establish criteria for the development of the income statement.
The indicators
The income statement allows you to know different indicators. Net operating income , for example, is obtained by recording the income earned from activities and then subtracting bonuses and discounts.
If the costs of the services that were provided and/or the products that were sold are also subtracted later, the gross result is obtained. To know the result of ordinary operations , administrative and sales expenses must be removed.
Other indicators associated with the income statement are the result before income taxes (which links financial, extraordinary and previous year income with expenses of the same type) and the result for the year or net result (which includes the impact of the impact to profits).
With this last indicator, it is also possible to calculate the EBITDA (acronym for the English expression Earnings before interest, taxes, depreciation and amortization ), which shows the result before the deduction of financial and tax charges, amortizations and depreciations. For specialists, EBITDA conveys the firm's actual operating performance .
It is important that financial planning is carried out according to the information in the income statement.
The usefulness of the income statement
The income statement, as we already indicated, is very useful . In a broad sense, business owners, shareholders and executives can know the company's profits and losses. Additionally, the distribution of dividends can be considered.
By examining the data in detail, the income statement also serves to perform a profitability analysis . It even provides valuable information about cash flow and the nature of expenses.
The income statement can also help attract new investors and access financing . Ultimately, what the document does is show the company's profitability and allow decision-making based on reliable information.
Your interpretation
The interpretation of an income statement requires taking into account several issues. It is common to suggest considering external references to put the data in context .
A broad overview is achieved if the information is compared with reports from the competition or the sector in general. This makes it possible to see if the results are in line with the market.
A comparison of a current income statement with previous ones, on the other hand, makes it possible to identify trends. This way, operations can be adapted or adapted to gain efficiency .
Monitoring margins , too, is key to examining profitability . In search of optimization, one option is to cut those operating expenses that appear unnecessary.
The income statement and control strategies
The study of the income statement can lead to the implementation of control strategies . If there is no solvency , one possibility is to reduce the cost of sales (and, in return, increase sales income) and operational expenses.
Controlling variable costs and fixed costs also helps improve the income statement. Analyzing the impact of short-term debt and long-term debt, on the other hand, is important to balance liabilities and assets .
Inventory control strategies constitute another mechanism that can be associated with the income statement. In all cases, the aim is to make the organization more efficient and, in this way, increase its profitability.
At this point it is essential to clarify that the data in the income statement must match reality and that no errors should occur in the record. Otherwise, the indicators will not be valid and decision-making will not be made according to objective criteria.