Understanding Income Statements: An Overview

Time frame: Fiscal year

Income statements also show Earnings Per Share (EPS). EPS shows how much money shareholders would receive if all of the net earnings for the period were distributed. (A highly unlikely occurrence; they’re usually reinvested.)

Income statements are set up stepwise. Starting at the top we see the total amount of sales made during the accounting period. As you go down, you subtract costs and additional operating expenses related to producing the revenue. After subtracting all expenses, you learn how much your company netted or lost during the accounting period. This is our “bottom line.”

At the top of the income statement, often referred to as gross revenues or sales, is the total amount of money generated from sales of products or services.

This is why the Statement of Cash Flows is important

How Income Statement relates to balance sheet

Operating Activities

• Cash generated from day to day operations of company.

• Income statement shows profits generated but not cash generated

• Adjust Net Income for non-cash expenses

• E.g. depreciation on assets

• Actual asset cost included in Investing Activities section

• Adjust Net Income for changes in Working Capital

• Net income must be adjusted for changes in Current Assets and Current Liabilities affected by Operations during the year.

• Increases in Current Assets use cash while increases in Current Liabilities free up cash.

• Calculation: subtract beginning balances of CA and CL from items ending balances.

Investing Activities

• Reflects cash used and generated by changes in long-term assets on balance sheet.

Financing Activities

• Two ways company can provide itself with financing:

• Borrow: reflected in Long-Term Liabilities section

• Raise money from investors: reflected in changes in Owners’ Equity accounts

• Other factor in owners’ equity is Retained Earnings