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An income statement, also known as a profit and loss statement, demonstrates a company’s financial performance during a defined period of time such as a month, quarter or year. An accountant typically chooses either a multiple-step or single-step format when preparing an income statement, depending on the amount of detail he must include in the statement. A person can calculate meaningful financial ratios from numbers revealed on a multiple-step income statement.
Single-Step Income Statement
A single-step income statement reveals a company’s bottom line, or net profit or loss, by demonstrating one mathematical equation. A single-step income statement shows that a company’s bottom line equals the total of its revenues and gains, minus the company’s aggregate expenses and losses -- or net income = (revenues + gains) – (expenses + losses). A single-step profit and loss statement does not separate a company’s income or expenses by type. A single-step income statement only itemizes income and expenses that result from accounting changes, extraordinary events or suspended operations above a company’s net profit or loss.
Multiple-Step Income Statement
Compared to a single-step profit and loss statement, a multiple-step income statement includes more detail by itemizing a company’s different sources of income and expenses. Before revealing a company’s net profit at the bottom of the income statement, a multiple-step income statement displays the company’s gross profit and operating profit.
A multiple-step income statement calculates a company’s gross profit by subtracting its cost of goods sold, or costs directly related to the company’s production of goods or services, from the company’s sales revenue. A multiple-step income statement displays a list of a company’s operating expenses below the company’s gross profit. Subtracting the total of a company’s operating expenses from its gross profit reveals the company’s operating income. A multiple-step income statement lists interest collected by a company and any interest or taxes paid separately below the company’s operating income. A multiple-step income statement includes income or expenses related to accounting changes, extraordinary events or suspended operations in this section as well. The total of a company’s other, or non-operating income, plus the company’s operating income equals its net income or loss.
Because a multiple-step income statement includes comparatively detailed information, a person can calculate various ratios using the document that he cannot calculate by reviewing a single-step profit and loss statement. These ratios include a company’s gross margin and profit margin. A company’s gross profit divided by its sales revenue equals the company’s gross margin. Dividing a company’s net income after taxes by its sales revenue reveals the company’s profit margin.
Earnings Per Share
A publicly traded company's income statement must display how much of the company’s net income is attributable to each share of stock, or the company’s earnings per share. A company’s earnings per share equals the company’s net income divided by the total number of shares outstanding.
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- U.S. Securities and Exchange Commission; Beginners' Guide to Financial Statements; February 2007
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