How to Read Income Statement: Expert Guide to Financial Analysis

on which financial statement will income summary be shown

Revenue that is not related to the core operations of your practice is accounted for in this section. This may include interest and other earning from investments, donations and gains or losses from the sale of assets. When you subtract the COGS income summary account from revenue, you see just how profitable your products are. In the above example, the revenue is about 10x the COGS, which is a healthy gross profit margin. Equity is the remaining value of the company after subtracting liabilities from assets.

The income statement, also known as the P&L (profit and loss) statement, is one of the crucial financial statements businesses use to evaluate their financial performance. When comparing it to the balance sheet, it’s essential to understand the differences and connections between them. The income statement showcases a company’s revenues, expenses, and net income for a specific period, while the balance sheet presents a snapshot of a company’s assets, liabilities, and equity at a particular point in time. Income statements are an essential financial document for investors and business owners, providing valuable insights into a company’s financial performance over a specified period, usually a quarter or a year. These statements summarize the financial transactions, including revenues, expenses, and net income, allowing you to assess a company’s profitability and overall financial health. By understanding how to read an income statement, you’ll be equipped with the knowledge to make informed decisions about investments and business operations.

Financial Statements: List of Types and How to Read Them

Lastly, financial statements are only as reliable as the information fed into the reports. Too often, it’s been documented that fraudulent financial activity or poor control oversight have led to misstated financial statements intended to mislead users. Even when analyzing audited financial statements, there is a level of trust that users must place in the validity of the report and the figures being shown. Below is a portion of ExxonMobil Corporation’s cash flow statement for fiscal year 2021, reported as of Dec. 31, 2021. We can see the three areas of the cash flow statement and their results.

  • EBIT is a term commonly used in finance and stands for Earnings Before Interest and Taxes.
  • If your total expenses outweigh your revenue, your net income will be in the negative.
  • In this part of our analysis of financial statements, we unlock the drivers of financial performance.
  • However, like every accounting tool, it must be used correctly and in coordination with other accounting tools to operate smoothly and provide value.
  • The accumulated depreciation ($75) is taken away from the original cost of the equipment ($3,500) to show the book value of equipment ($3,425).
  • These are all expenses incurred for earning the average operating revenue linked to the primary activity of the business.

If the debit column were larger, this would mean the expenses were larger than revenues, leading to a net loss. The $4,665 net income is found by taking the credit of $10,240 and subtracting the debit of $5,575. When entering net income, it should be written in the column with the lower total.

Example of an Income Statement

This format is less useful of external users because they can’t calculate many efficiency and profitability ratios with this limited data. Although financial statements provide a wealth of information on a company, they do have limitations. The statements are often interpreted differently, so investors often draw divergent conclusions about a company’s financial performance.

Learning how to read and understand an income statement can enable you to make more informed decisions about a company, whether it’s your own, your employer, or a potential investment. This type of analysis makes it simple to compare financial statements across periods and industries, and between companies, because you can see relative proportions. In addition to helping you determine your company’s current financial health, this understanding can help you predict future opportunities, decide on business strategy, and create meaningful goals for your team. In Completing the Accounting Cycle, we continue our discussion of the accounting cycle, completing the last steps of journalizing and posting closing entries and preparing a post-closing trial balance. You may notice that dividends are included in our 10-column worksheet balance sheet columns even though this account is not included on a balance sheet. There is actually a very good reason we put dividends in the balance sheet columns.