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The income statement measures the economic performance for a business over a given period of time, typically a quarter or a year. To provide this adequate measurement, all revenues, expenses, gains and losses must be summarized resulting in the business’ net income. Net income indicates the profit which is essentially all revenues and gains over the period minus the expenses and losses. Net income exhibits a company viability.
The income statement represents a period of time within which the business was in operation. In contrast, the balance sheet is a snap shot of the company’s performance at a single moment in time. Businesses produce income statements. However, charitable organizations do not. They use a similar format to produce a Statement of Activities which demonstrates the sources of funding in contrast to program expenses and administrative costs etc.
Components of the Income Statement
- Net Revenues: This is a summary of revenue received from the sale of goods and services as a result of a company’s normal operations.
- Cost of Goods Sold: This represents the amount of inventory sold to customers during the period if it is a retailing company. If it is a manufacturing company, this measures the cost of goods manufactured that have been sold. This includes the raw materials, labor and everything used in the manufacturing process.
- Selling Expenses: These expenses involve those used to generate sales like sales commissions, advertising and promotions.
- Administrative Expenses: These include all general operating expenses such as salaries, office supplies and insurance.
- Discontinued Operations: Any gains or losses from the selling or disposing of part of the company’s operations.
- Extraordinary Items: This refers to a gain or loss from an unusual event like a natural disaster.
- Earnings Per Share: This reports the amount of earnings per each outstanding share of a company’s stock. It is calculated by dividing the net income by the number of common stock shares outstanding.