Income Statement Format: Steps For Creation

The income statement is an important type of financial document that gives an overview of a company's financial performance over a specific period. his financial statement is also known as the Profit and Loss statement. As a key component of a company's regular financial reporting, the income statement systematically accounts for all revenues and expenses.T

In this article, we will be discussing the income statement format to understand how this financial statement is created.

Table of Contents

• What is an income statement?
• Income Statement Format
• Reading The Income Statement
  • Comprehending the Income Statement
• Importance
• Understanding the income statement format

What is an income statement?

The income statement is one of the core financial statements of the company in which the profit and loss of the company are also reported. Here, profit and loss are determined by considering the revenue and subtracting every expense from both operating and non-operating activities. 

It is one of the three financial statements that are used in both accounting and financial modelling. Here, the income statement displays the costs, revenues, administrative expenses, gross and net profit. It is considered to be the predecessor of the balance sheet and cash flow statement. Since it requires less information than cash flow statements and balance sheets, it can help in building a financial model. 

Income Statement Format

It is important to understand the format of the Income statement to ensure that operating results are communicated well to outsiders. The income statement format includes the following details:

• Name of the Company
• Title Stating Income Statement
• Time Period for which income statement has been prepared
• Components including revenue, expenses, profit before taxes, tax expenses and net profit/net income

Here is a sample of the Income Statement to understand its format.

Reading The Income Statement

Let us try to understand every component of this income statement:

1. The document is titled "INCOME STATEMENT 2021-2022", which indicates this is a financial statement showing the company's income and expenses for the fiscal years 2021 and 2022.
2. The "Figures USD" column shows the various line items in US dollars.
3.  "Sales (Revenue)" which represents the total amount of sales or revenue generated by the company in each year.
4. "Less: Cost of Goods Sold (COGS)" which shows the direct costs associated with producing the goods or services sold by the company.
5. "Gross Income" is the difference between Sales and Cost of Goods Sold, representing the company's total profit before operating expenses.
6. "Less: Selling, General, Administrative Costs (SG&A)" includes the indirect expenses required to run the business, such as marketing, administrative, and general overhead costs.
7. "Operating Income Before Depreciation (EBITDA)" is the company's earnings before interest, taxes, depreciation, and amortization are deducted.
8. "Less: Depreciation, Amortization, Depletion" shows the non-cash expenses related to the wearing down of the company's assets over time.
9. "Operating Income (EBIT)" is the company's operating profit after deducting depreciation, amortization, and depletion.
10. "Less: Interest Expense" shows the cost of borrowing money.
11. "Non-operating Income" includes any income the company generates from sources outside of its core business operations.
12. "Less: Non-operating Expenses" includes any expenses not related to the company's main business activities.
13. "Pretax Accounting Income" is the company's profit before income taxes are deducted.
14. "Less: Income Taxes" shows the amount of taxes the company must pay on its profits.
15. "Income Before Extraordinary Items" is the company's net income excluding any unusual or one-time events.
16. "Less: Preferred Stock Dividends" represents dividends paid to the company's preferred shareholders.
17. "Income Available for Common Stockholders" is the net income available to the company's common shareholders after preferred dividends are paid.
18. "Less: Extraordinary Items" and "Less: Discontinued Operations" show any unusual or non-recurring gains or losses.
19. "Adjusted Net Income" is the company's final net income figure after all adjustments.
20. "Earnings Per Share" shows the company's net income divided by the number of outstanding common shares.

Comprehending the Income Statement

Based on the above income statement, the key takeaways are the following:

1. The company's revenue and gross income declined from 2021 to 2022.
2. Operating expenses like SG&A and depreciation also decreased, but not enough to offset the decline in revenue.
3. This resulted in a drop in operating income (EBIT) and final adjusted net income from 2021 to 2022.
4. The company's earnings per share also declined significantly, from $1.50 in 2021 to $0.98 in 2022.

Importance of Income Statement

Through income statements, business owners can decide whether they can generate profit by either increasing revenues or by decreasing costs. Through income statements, companies can analyze the effectiveness of the strategies that the business has set at the start of a financial period. Unlike other financial statements, the income statement is generated on either a monthly or quarterly basis. This helps business owners as well as investors in closely tracking the performance of the business and making informed decisions.

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Learning the Income Statement Format

Add a header to this financial statement identifying it as the income statement. After that, add business details and reporting periods that have been covered by the income statement. The following steps are to be followed while you start learning the income statement format. 

1. Deciding the Reporting Period 

The first step in learning in an income statement format is the reporting period of the statement. This reporting period may be on a monthly, quarterly or annual basis. Based on the size of the company, the report can be created on a monthly or quarterly basis. However, a monthly income statement helps in identifying trends in profit or expenditure. Based on this information, one can make business decisions that will help in making your company more profitable.

2. Generating the Trial Balance Report

For generating the income statement for the business, it is important to print a standard trial report. For this purpose, you can use cloud-based accounting software so that you can generate the trial balance. Trial balance reports refer to the internal documents that list the final balance of every account in the general ledger for a specific reporting period. To gather data for their account balances, companies need to create a balance sheet which is important for creating income statements. This provides you with the end balance figures that you require for creating an income statement.

3. Calculating the Revenue

The next step of the income statement format is calculating the total sales revenue of the business for a reporting period. It includes the money earned for all services during the reporting period irrespective of receiving the payment. For this, add up all revenue line items from the trial balance report and enter the total amount in the revenue line item of the income statement. 

4. Cost of Goods Sold (COGS)

It refers to the Cost of Goods Sold that is part of the income statement. This is the direct cost incurred in producing goods or in keeping inventory. This does not include other overhead expenses that are related to the general business operations. When COGS exceeds the revenue generated by a company in a reporting period, then the company has made no profit. COGS helps in analysing how payroll costs and purchasing are being controlled.

5. Gross Profit Margin

It is a metric that helps in assessing the financial health of the company. For this purpose, the company calculates the amount of money remaining after reducing the COGS from the sales of the product. This figure is divided by net sales for expressing the gross profit margin which is expressed as the sales percentage. 

6. Operating Expenses

Operating expenses are also known as the selling, general and administrative expenses (SG&A). These are the costs of conducting business which include rent, utilities, marketing, advertising, management, sales and accounting. These are overhead in nature and represent fixed costs since they are not directly linked with the sales of goods and services.

Add up every operating expense that has been listed in the trial balance report. Double-check every expense line to ensure that you have got the correct figures. Now enter the total amount into the income statement as the selling and administrative expenses line item which will be located directly below the gross margin line. 

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7. Calculating the Income 

The next step in the income statement format is calculating the income and income tax. Now, subtract selling and administrative expenses from the gross margin to get the pre-tax income amount. You will have to enter this amount at the bottom of the income statement. Now, multiply the applicable state tax rate with the pre-tax income figure and add this below the pre-tax income figure in the income statement.

Another crucial detail that you have to include in the income statement format is the net income. You need to subtract the income tax format from the pre-tax income figure. Now, enter this figure into the final line item of the income statement. This will help you in assessing the performance of your business and identify whether or not your business is profitable.