Income statement: what do you know about it?

Would you like to know how a company’s business model works through a list of expenses, revenues, losses, and profits that occurred during a specific time? Do you want to know the company’s performance during that period? You must be familiar with the income statement and its components, as this is her primary responsibility. You will be fully aware of your company’s profit or loss by reading it, but the most important question remains: Who can make this list in the best way? Undoubtedly, the Qoyod program is the best integrated cloud accounting program ever, as it saves everyone time and effort and provides a point-of-sale system and electronic invoice systems.

What is an income statement?

The company prepares this list to track its performance in terms of profit and loss over a specific period. It displays the amount of expenses the company incurs to cover these costs, known as expenses, and the amount of returns it receives from sales, known as revenues, which are calculated by subtracting expenses from revenues. If revenues are greater than expenses, the company is profitable, but if the opposite happens, the company will be at a loss. This income statement also explains in detail the various sources of each of its expenses and revenues in order to show a clearer picture of its performance areas.

Components of income statements

While the components of the income statement may vary slightly from one company to another, the following primary elements remain constant:

• Revenues

An organization’s business activities generate revenue, also known as sales. The income statement displays the company’s revenue, also known as sales, at the top.

• Cost of goods sold

If your organization is in the services business, what you spend on those services is cost of sales, which is the line item that shows the direct costs of services and products sold to generate revenue.

• Marketing and advertising expenses

Advertising, marketing, and promotion expenses relate to the sale of the service or commodity after marketing it. It is worth noting that Qoyod, which is the best integrated accounting program, offers all of this and more at unprecedentedly competitive prices.

1. Total profits

One of the most crucial parts of the income statement is gross profits, which represent the company’s total profit after deducting the cost of goods sold from revenues.

• Administrative and general expenses

Administrative and general expenses encompass all indirect costs related to business management.

 

• Other operating expenses.
• Office expenses and rent.
• Expenses related to amortization and depreciation.
• Wages and salaries.
• Travel expenses.

• Losses

It is one of the components of the income statement, and it includes all expenses that result from any sale at a loss of any long-term assets or other unusual costs.

• the benefits

All the benefits that accrue to the company are included in a detailed item in order to differentiate between income before tax and income before interest and tax.

• Depreciation and amortization expenses

Depreciation and amortization expenses are one of the components of the income statement, and they are those non-cash expenses that accountants create in order to distribute the cost of capital assets, which are facilities, property, and equipment.

Income statement objectives

The income statement helps companies with the investment and financial efficiency of business activities, as well as many other goals, which are as follows:

• If there is an increase in profits, it will increase the value of the company’s shares on the stock exchange.
• It helps in evaluating the company’s performance and identifying it for investors.
• It explains a company’s expenses and revenues, as well as determining its profitability.
• It demonstrates the company’s financial ability to pay its obligations.
• It is relied upon for planning, making future decisions, and making strategies.
• It is used in matters related to loans within financial institutions and banks.

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Income statement items

The income statement contains several main elements that contribute to providing a clear picture of profits and losses, which are as follows:

Sales revenue

It represents all the money that the establishment receives from selling its products or services during the financial period covered in the list. It is worth noting that this number includes all sales, whether cash or on account. It is the first and most important element on the list because it reflects the facility’s ability to generate income from its main activity.

Gross profit

It is the difference between sales revenue and the cost of goods sold, and it expresses the initial profit that the business achieves from its sales before deducting operating expenses. Do not forget that this number represents an approximate indicator of the basic profitability of the business before calculating additional costs.

Operating expenses

Operating expenses include all expenses that an entity spends on operating its business activity. These expenses include:

• Equipment cost.
• Marketing expenses
• Employee salaries.
• Other administrative costs

It is worth noting that these expenses are subtracted from the gross profit to determine operating profit.

Cost of goods sold

It encompasses all expenses related to the production of the goods or the provision of the services sold.

• Raw materials.
• Labor cost.
• Shipping costs.
• Expenses related to packing and wrapping products.

This item helps determine gross profit by subtracting it from sales revenue.

Operating profit

It is the profit generated from commercial activity after deducting all operating expenses. It is worth noting that this number expresses the facility’s efficiency in managing its operations and achieving profits from its primary activity. It is important to note that operating profit does not include non-operating expenses such as taxes and interest.

Depreciation expenses

It represents the gradual distribution of the cost of fixed assets (such as equipment and machinery) over their useful lives. The income statement periodically calculates these expenses to reflect the assets’ declining value due to use and time.

Interest expense

These are the costs incurred by the enterprise as a result of the loans it obtained. These interests are paid to banks or other lenders and reflect the cost of debt financing during the financial period.

Profits from selling investments

This item expresses the profits realized from the sale of assets or investments that are not part of the entity’s main activity and includes:

• Land sales.
• Financial assets owned by the entity.

Tax expenses

It includes all amounts that the entity must pay to the tax authorities based on its profits and is deducted from the profit before taxes to determine the final net profit.

An example of the most important items of the income statement

Statement	sum
Sales revenue (-) Cost of sales	XX                             (XX)
Operating profit	XX
Gross profit	XX
Other expenses Loss on sale of a fixed asset Depreciation expense	(XX)           (XX)
Net profit before taxes and interest	XX
Operating expenses	XX
Other income   Profits from selling investments	XX
Net profit before taxes and interest	XX
Net profit/loss	XX

Components of the statement of comprehensive income

Comprehensive income elements include a variety of items that are not included in net profit or loss but affect the company’s financial position. The most prominent of these elements are:

• Gains or losses from foreign currency operations: relating to changes in exchange rates affecting assets and liabilities denominated in foreign currencies.
• Losses or gains in the exchange rate: They occur as a result of changes in the value of the currency when transferring financial amounts between different currencies.
• Gains or losses on the purchase of securities: These include profits or losses resulting from the revaluation or sale of securities available for sale.

Comprehensive income

Comprehensive income is calculated by adding net profit or loss to the total elements of comprehensive income, as this number represents the complete picture of the company’s financial performance, including items that do not appear in the traditional income statement.

Examples of components of the statement of comprehensive income

Statement	2022	2023
Profit or loss for the year	100	50
Comprehensive income/loss
Value of reclassified securities	30	15
Value of foreign currency operations	25	20
Exchange rate gains and losses	10	5
Total comprehensive income/loss	145	60

In this example, our company achieved a net profit of 100 thousand Saudi riyals in 2022 and 50 thousand Saudi riyals in 2023, and when adding the comprehensive income elements, we find the following:

Value of reclassified securities

The company achieved gains of 30 thousand Saudi riyals in 2022 but incurred losses of 15 thousand Saudi riyals in 2023.

Value of foreign currency operations

There were gains of 25 thousand Saudi riyals in 2022 and 20 thousand Saudi riyals in 2023.

Exchange rate gains and losses

The company incurred losses of 10,000 Saudi riyals in 2022 but achieved gains of 5,000 Saudi riyals in 2023.

When we add all these elements, we get the company’s total comprehensive income:

• In 2022, total comprehensive income reached SAR 145 thousand.
• In 2023, total comprehensive income reached 60 thousand Saudi riyals.

Types of income statements

Income statements can be divided into two main types:

One-step income statement

In this type of statement, all revenues are collected in one section, whether they are operating revenues (such as sales of goods or services) or non-operating revenues (such as interest income or investments).

Likewise, all expenses are grouped into one section, whether they are operating expenses (such as the cost of goods sold and salaries) or non-operating expenses (such as interest paid).

By subtracting total expenses from total revenues, the net profit or loss can be arrived at. But this type of statement is not particularly useful for evaluating the financial performance of operations because it does not separate operating and non-operating profit, and thus analysts lack the ability to clearly evaluate operating performance.

An example of a one-step income statement

Statement	sum
Revenues: Sales revenue Investment income Total revenue	400.000 300.000 700.000
Expenses: Operating expenses General expenses Marketing expenses (Total Expenses)	160.000 40.000 60.000 260.000
Net profit	440.000

 

Multi-step income statement

This list takes a more detailed approach, separating operating and non-operating income as well as expenses.

First, operating income, such as sales, is included, followed by deducting operating expenses, such as the cost of goods sold and salaries, to arrive at operating profit.

After that, non-operating income and non-operating expenses are listed to arrive at net profit or loss. It is worth noting that this type of statement gives a more accurate and comprehensive look at the financial performance of the facility because it clearly highlights the operating profit.

Notice

Although preparing an income statement with multiple steps requires more time and effort to collect and detail data, it provides more accurate information to analysts and investors about the financial performance of the facility, which helps them make more informed investment and management decisions.

An example of an income statement with multiple steps

Statement	sum
Sales revenue (-) Cost of goods sold	400.000 80.000
Gross profit	320.000
(operating expenses)	80.000
Operating profit	240.000
(Other expenses)	20.000
Other income	80.000
Net profit before taxes and interest	284.000
(interest expense) (tax expense)	40.000 28.000
Net profit or net loss	196.000

The practical importance of both types

One-step income statement: simpler and quicker to prepare, but less useful for analyzing operating performance.

Multi-step: Despite its complexity, it provides more accurate and comprehensive information about financial performance, making it a valuable analytical tool for investors and management.

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Sample income statement

If you want to download the income statement form, simply click here.

Income Statement: Frequently Asked Questions

What is an income statement?

The income statement, also known as the profit and loss statement, is a financial document that shows a company’s financial performance during a specific period by recording revenues and expenses to arrive at net profit or loss.

What are the components of the income statement?

The income statement includes the following components:

1. Revenue: A company’s sales of products or services.
2. Cost of goods sold: direct costs associated with producing products or providing services.
3. Marketing and advertising expenses: costs associated with promoting products or services.
4. Administrative and general expenses include indirect costs such as insurance, office expenses, rent, salaries, and travel expenses.
5. Gross profit: the difference between revenue and the cost of goods sold.
6. Losses: Expenses resulting from selling assets at a loss or unusual costs.
7. Interest: Interest accrues on loans.
8. Depreciation and amortisation expenses: non-cash expenses for apportioning the cost of capital assets.

What are the objectives of the income statement?

The income statement helps:

1. Evaluating the company’s financial performance.
2. Determine profitability and the company’s ability to pay its obligations.
3. Planning and making future decisions.
4. Providing information to investors and financial institutions.
5. Increase the value of shares on the stock exchange.

What is the difference between a one-step income statement and a multiple-step income statement?

1. One-Step Income Statement: group all income and expenses into one section, making it easier to prepare but less detailed.
2. A multi-step income statement separates operating and non-operating revenues and expenses, providing more accurate and detailed information about financial performance.

How do I prepare an income statement?

You can prepare an income statement using cloud accounting software such as “Qoyod,” which facilitates the process of preparing financial statements and provides integrated systems for managing invoices and sales.

Can the income statement include non-cash items?

Yes, the income statement includes non-cash items such as depreciation and amortization expenses that reflect the cost of capital assets over their useful lives.

How does the income statement contribute to improving managerial decisions?

By providing a clear picture of revenues, expenses, profits, and losses, the income statement helps management make informed decisions about improving financial performance and planning future strategies.

Can the income statement affect the company’s stock market valuation?

Yes, increasing the profits included in the income statement can raise the value of the company’s shares on the stock exchange and enhance investors’ confidence in its financial performance.

Excerpt

Banks and financial institutions use the income statement in all loan-related matters because it increases the value of shares on the stock exchange and shows the company’s financial capacity to meet its obligations, so it is important to pay attention to it.

Conclusion

The income statement, or what is called the profit statement, operating list, or income statement, is a way to clarify the company’s losses and profits by subtracting expenses from revenues. Therefore, you should pay great attention to this list because of its direct impact on clarifying the company’s profit and loss. It is worth noting that this type of list has four basic elements, namely: revenues, expenses, profits, and losses, and because we are fully aware of the difficulty of preparing this list on your own, we have provided you with Qoyod, the best cloud accounting program ever, as it will do that for you. So, focus all your attention on your main work and leave it to us.

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