Income statement

Definition

An income statement is a financial document that summarizes a company's revenues, expenses, and profits over a specific period. It provides insight into the company’s operational efficiency and profitability.

5 Must Know Facts For Your Next Test

1. The income statement is also known as the profit and loss statement (P&L).
2. It typically includes sections for revenue, cost of goods sold (COGS), gross profit, operating expenses, and net income.
3. Revenues are recorded when they are earned, not necessarily when they are received.
4. Operating expenses include costs such as salaries, rent, and utilities that are necessary for running the business.
5. Net income is calculated by subtracting total expenses from total revenues; it represents the company’s overall profitability.

Review Questions

• What are the main components of an income statement?
• How is net income calculated on an income statement?
• Why is the timing of revenue recognition important in an income statement?

Related terms

Balance Sheet: A financial statement that provides a snapshot of a company's assets, liabilities, and shareholders' equity at a specific point in time.

Cash Flow Statement: A financial document that tracks the flow of cash in and out of a business over a specified period.

Gross Profit: The difference between revenue and the cost of goods sold (COGS) before deducting operating expenses.