Income statements, sometimes referred to as profit and loss statements, explain how much money a company made and how much it lost during a specified time period, usually a year. Shareholders use this financial document to decide whether to keep their money invested in a company, and investors use it to determine whether to invest in a company.
The income statement shows much money a company earned during the time period covered by the statement. This is the total sales made, also called the gross revenue. However, this alone does not tell the total picture of how profitable the company was for that period. Thus, the revenue must be looked at in relation to the other parts of the income statement.
Costs and Expenses
The income statement also states how much money the company had to spend to make the revenue listed in the statement. This might include equipment outlay, money spent on a lease or commercial mortgage and wages paid to workers. By knowing how much it cost a company to make the revenues reported in the income statement, shareholders and investors get a better idea of the company’s actual profits.
Allowances and Depreciation
This section of the income statement shows what money the company is not expecting to collect. This could include money discounted from sold merchandize on clearance and goods that were returned and can’t be resold because they are damaged. In other words, this refers to losses. Depreciation also gets deducted from the gross revenue. This refers to value lost on assets like machinery and tools used to produce the goods sold or services rendered by the company.
Earnings Per Share
While companies rarely distribute all their net earnings to shareholders because they must reinvest in earnings into their operations, the Earnings Per Share calculation tells shareholders how much money they would get if the company was to do so.
The Bottom Line
At the end of the income statement, once you see the total revenue, deduct the cost and expenses, and allowances and depreciation, you see what is actually left in profits during the stated period. This is the company’s net revenues or margin.
Cynthia Gomez has been writing and editing professionally for more than a decade. She is currently an editor at a major publishing company, where she works on various trade journals. Gomez also spent many years working as a newspaper reporter. She holds a bachelor's degree in journalism from Northeastern University.