Accounting Tutorials
- Income Statement
- Income Statement | Top Examples | Template | Format | Analysis
- Income Statement Basics
- Income Statement Examples
- Income Statement Formats
- Income Statement Template
- Income Statement Formula
- Multi Step Income Statement
- Profit and Loss Statement Template
- Profit And Loss Statement Format
- Book Profit
- Contribution Margin Income Statement
- Sales Revenue
- Net Sales Formula
- Variable Costing Income Statement
- Pro Forma Income Statement
- Purpose of Income Statement
- Income from Operations Formula
- Cost of Goods Sold
- Cost of Goods Manufactured (COGM)
- COGS Formula
- Cost of Goods Sold Examples
- Cost of Sales Formula
- SG&A Expenses (Selling, General & Administrative)
- Interest Expense Formula
- List of Operating Expenses
- Non Operating Income
- Pretax Income (Earnings Before Taxes)
- Income Tax Expense
- Income Tax Accounting
- Earned Income
- Average Total Cost Formula
- Gross Profit
- Gross Profit Formula
- Direct Costs
- Indirect Costs
- Prime Cost
- Duty vs Tariff
- EBITDA
- EBITDA Calculation
- Adjusted EBITDA
- EBIT (Earnings Before Interest and Tax)
- EBIT Calculation
- Net Operating Income
- Operating Income
- Turnover vs Profit
- Operating Profit vs Net Profit
- Net Income Formula
- EBITDA Formula
- Operating Expense (OPEX)
- Operating Expense Examples
- Interest Expense
- LTM EBITDA
- NOPAT
- Non Recurring Items
- EBIT vs EBITDA | Top Differences | Examples | Calculation
- Depreciation – Formula | Types | Most Comprehensive Guide
- Depreciation Expense Formula
- Depreciation Rate
- Straight Line Depreciation Method Formula
- Accumulated Depreciation Formula
- MACRS Depreciation
- Depreciation Tax Shield
- Accelerated Depreciation
- Written Down Value Method
- Depletion Expense
- EBITDA vs Operating Income
- Straight Line Depreciation Method
- Sum of Year Digits Method of Depreciation
- Declining Balance Method of Depreciation
- Land Depreciation
- Double Declining Balance Method
- Amortization of Intangible Assets
- Depreciation vs Amortization
- Unrealized Gains (Losses)
- Non Cash Expense
- Warranty Expense
- Other Expenses
- Accrued Income
- Share based compensation
- Restructuring Cost
- Extraordinary Items
- Interest Income
- Lease Payment
- Financing Costs
- Effective Tax Rate Formula
- Progressive Tax
- Taxable Income Formula
- Completed Contract Method
- Tax Shield Formula
- Double Taxation
- Marginal Tax Rate
- Tax Haven
- Net Loss
- Pro-Forma Earnings
- Margin vs Profit
- Net Operating Loss (NOL)
- Tax Loss Carry Forward
- Tax Loss Harvesting
- Tax Shield
- Sundry Expenses
- Trade Discount
- Trade Discount vs Cash Discount
- Percentage of Completion Method
- Interest vs Dividend | Top 9 Differences (with Infographics)
- EBITDA vs Net Income
- EBIT vs Net Income
- EBIT vs Operating Income
- Above the Line vs Below the Line
- Operating Income vs Net Income
- Cost vs Expense
- Expense vs Expenditure
- Accounting Profit vs Economic Profit
- Income Tax vs Payroll Tax
- Tax credits vs Tax deductions
- Tax Evasion vs Tax Avoidance
- Sales Tax
- Excise Tax
- Indirect Tax
- Direct Tax vs Indirect Tax
- Tax Lien
- Value Added Tax (VAT)
- Ad Valorem Tax
- Estimated Tax
- Proportional Tax
- Tax-Exempt
- Marginal Tax Rate Formula
- Regressive Tax
- Regressive Tax Examples
- Gross Income vs Net Income
- Profit vs Revenue
- Revenue vs Earnings
- Revenue vs Net Income
- Revenue vs Income
- Profit vs Income
- Revenue vs Sales
- Revenue vs Turnover
- Capitalization vs Expensing
- Income Statement vs Balance Sheet | Top 5 Differences You Must Know!
- Statement of Comprehensive Income | Items | Colgate Example
- Variance Analysis
- Other Comprehensive Income
- Partial Income Statement
- Income Summary Account
- FOB Destination
- Explicit Cost
- Implicit Cost
- Direct cost vs Indirect Cost
- Fixed Cost
- Fixed cost vs Variable cost
- Price vs Cost
- Hard Cost vs Soft Cost
- Overhead Costs
- Nopat vs Net Income
- Marginal Costing vs Absorption Costing
- Marginal Cost Formula
- Margin vs Markup
- Markup Formula
- Contribution Margin vs Gross Margin
- Accounting Basics (80+)
- Bookkeeping (52+)
- Balance Sheet (30+)
- Assets (109+)
- Liabilities (68+)
- Shareholders Equity (91+)
- Cash Flow Statement (17+)
- Accounting Careers (26+)
- Accounting Books (8+)
- Budgeting in Finance (31+)
Related Courses
Income statement is one of the important financial reports of company which is prepared with the purpose of providing the summary of all the revenues and the expenses over the time period in order to ascertain the profit or loss of the company and measuring its business activity over the time period depending upon various requirements of users of income statement.
What is the Purpose of Income Statement?
The income statement is the statement of all expenses and income over a period of time. Every business when preparing the financial statements starts with preparing the income statement for that period. The income statement forms an integral part of the books of accounts, the income statement serves as an indicator for the business which shows the performance of the company for the period ending every year or whenever the statement is prepared.
- The purpose of the income statement is to provide a representation of the company’s performance during a period to the investors and the value of the company which affects the share price.
- The income is used to summarize the profitability of the company by classification of revenue and expense accrued in the income statement during that period.
Purpose of Income Statement for Various Stakeholders
The purpose of the income statement is also to serve as a reporting tool for various stakeholders: –
#1 – The Management
source: Colgate SEC Filings
The most vital viewer of the income statement is the management The purpose of the income statement is an account which gives the directors and the executive a very clear picture of the performance of the company during the period. The income statement of the period serves as an indicator of how the strategy which was planned by the management of the company at the beginning of the period has paid off and where is the scope of improvement
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#2 – The Investor
If the company is a publicly-traded entity then the annual report of the company needs to be prepared and published annually before the books are closed. The most important purpose of the income statement is that it serves as a good source of analysis of the investors who are willing to invest their stake in the company. The income statement serves as a good source to do fundamental analysis of the company, the investor can analyze the income statement and can make an economic decision on whether he should invest his stake in the company or not.
#3 – The Lender
The Lender of the company is also an important purpose of the income statement and every quarter the banks or the financial institutions demand the income statement to be submitted for the review of the bank and the utilization proceeds of it. The bank after analyzing the income statement decides whether it wants to extend the limit which is enjoyed by the company or does it needs to amend the sanction terms as per the company reporting numbers
#4 – The Creditors
The creditors of the company who are mainly short-term creditors like the suppliers and the subcontractor also should have a close look at the numbers reported by the company. The income statement shows the creditworthiness of the company and the capacity of the company to repay its current obligation. The income statement can also serve as an indicator for the suppliers and the creditors whether to maintain the relationship and the credit terms with the company.
Importance of Income Statement
- Most important is that the income statement provides all the stakeholders, the summary of the company’s performance during the period. All the activity and the quantum of the activity performed by the company during the period is summarized in the income statement.
- The income statement is a good statement for comparison of the company under analysis with its past year performance and also among the peer companies operating in the industry. All the analysts in the industry or tracking the stock of the company use the income statement to analyze the numbers and it’s peer’s numbers. The comparison of the margins and the growth in revenue and expenditure can be quickly compared if the income statement is presented in the same format.
- The income statement is also important for forecasting purposes of any company. Taking the past performance numbers of the company the future growth and the revenue projections of the company are forecasted. For example, in the sample income statement, the finance manager or the analyst can forecast the projected numbers of the year by analyzing the past trends of revenue and expenses
- The income statement also shows the classification of the revenue and the expenses which shows how each department of the company is performing. It gives a good indication to the manager or the management on which expense of the company is growing at an unexpected rate and which expense needs to be cut down in future
- The income statement is important for ratio analysis, valuation, equity research of the company. All analysts and research houses who track the company make extensive use of the income statement to analyze, forecast and do a valuation of the company which is used to make a future economic decision on the company. Various income ratios like gross margin, EBITDA margin, Interest coverage ratio, and other income ratios can be easily derived from the sample income statement which is an important source of analysis
- The income statement forms a vital part of the annual report of a public listed company. Moreover, companies who are publicly listed companies are bind to report the financial statement of the period ending. The income statement is the most important part of the three financial accounts as it gives the user the snapshot and the performance result of the company. The cash flow and the balance sheet are also formed with the help of the income statement numbers.
- Based on the income statement of the company there are a lot of decision and the business plans which are dependent on the income statement. The management can take decision for inorganic or organic growth also the market reputation and the analyst consensus is also very much dependent on the numbers reported on the income statement.
Thus, the income statement serves many purposes and also provide valuable insights to various internal and external parties and stakeholders. A company cannot survive or exist without reporting or preparing its income statement. A proper command on the numbers of the finance department and manager is what is demanded by any business in order to have control and to reflect the true picture of the company’s income statement.
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This has been a guide to the Purpose of Income Statement. Here we discuss the purpose of the income statement for various stakeholders and also the importance of income statement. You may learn more about Accounting from the following articles –
