How To Prepare An Income Statement: Step-By-Step Guide

The income statement should be used in tandem with the balance sheet and statement of cash flows for a clear view of business performance. With insights from all three of these reports, you can make informed decisions about how best to grow your business. Income statement reports show financial performance based on law firm bookkeeping revenues, expenses, and net income. By regularly analyzing your income statements, you can find areas of improvement, compare your business against competitors, and gather other key financial insights. Because Cheesy Chuck’s tracks different types of expenses, we need to add the amounts to calculate total expenses.

• Figure 1.9 “Merchandising Company Income Statement for Fashion, Inc.” presents an income statement for Fashion, Inc., a retail company that sells clothing.
• If you have more than a few income streams or a complicated financial landscape, we suggest using multi-step income statements to get a better view of your profits and losses.
• The next step was to create the income statement, which shows the financial performance of the business.
• Accessing balance sheet and income statement software is a surefire way to save you time, stress, and money — as you make the right decisions towards letting your business be the best that it can be.
• Cash flow from financing activities includes cash received from borrowing money or issuing stock, and cash spent to repay loans.
• A total of $560 million in selling and operating expenses, and $293 million in general and administrative expenses, were subtracted from that profit, leaving an operating income of $765 million.
• Consider enrolling in Financial Accounting—one of three courses comprising our Credential of Readiness (CORe) program—which can teach you the key financial topics you need to understand business performance and potential.

The former chief executive, Martin Grass, was sentenced to eight years in prison and the former chief financial officer, Franklyn Bergonzi, was sentenced to 28 months in prison. Rite Aid’s stock fell from a high of $50 per share to $5 per share in 2003. If your business owns stocks in other companies, you will receive dividend payments. This is another non-operating revenue because it is not a day-to-day activity and is not the main operation of your business. However, you will need to debit contra revenue accounts because they are the opposite of revenue accounts. Operating expenses are the usual expenses incurred in operating the business.

Balance sheet example for YYZ Corp. for the year ending Dec. 31, 2022 (in millions)

Many companies prefer this approach because it means they do not have to prepare a separate schedule. According to the complaint, Rite Aid executives committed financial fraud in several areas, one of which involved inventory. At the end of the company’s fiscal year, the physical inventory count showed $9,000,000 less than Rite Aid’s inventory balance on the books, presumably due to physical deterioration of the goods or theft. Rite Aid executives allegedly failed to record this shrinkage, thereby overstating ending inventory on the balance sheet and understating cost of goods sold on the income statement. Record incoming money from main business operations in your Revenues/Sales account.

Accountants have an ethical duty to accurately report the financial results of their company and to ensure that the company’s annual reports communicate relevant information to stakeholders. If accountants and company management fail to do so, they may incur heavy penalties. Next, we created the statement of owner’s equity, shown in Figure 2.12.

Effective date of amendments to IAS 1

Ultimately, horizontal analysis is used to identify trends over time—comparisons from Q1 to Q2, for example—instead of revealing how individual line items relate to others. Depreciation is the process of deducting the total cost of something expensive purchased for your business. However, instead of doing it all in one tax year, you write off parts of it over time. When you depreciate assets, you can plan how much money is written off each year, giving you more control over your finances. Common size income statements make it easier to compare trends and changes in your business. How you calculate this figure will depend on whether or not you do cash or accrual accounting and how your company recognizes revenue, especially if you’re just calculating revenue for a single month.

It also helps you analyze whether performance metrics are improving. 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. Your reporting period is the specific timeframe the income statement covers. It shows you how much money flowed into and out of your business over a certain period of time.