How to Define an Income Statement

Whether you're a novice investor or have owned stock in blue chip companies for years, your understanding of the income statement is essential to building wealth. Continue reading and learn how you can improve your bottom line by understanding the components of an income statement.

Instructions

1. Define its purpose. The income statement represents a company's financial performance for a given period of time. In other words, it outlines the revenue or sales earned as well as the liabilities or debts incurred in a month, quarter or year. This information helps decision-makers plan for the future.

2. Specify the categories or sections of the financial statement. The income statement is a comprehensive document that specifies components related to operating a business. Sales, expenses, net profit or loss and earnings per share are all included. Executives depend on the accuracy of this statement to guide their decisions about future business strategies.

3. Explain total sales and/or revenue. Rather self-explanatory, this section details the total amount a company earned through the sale of products and/or services. It is listed first and all the following entries are deducted from this amount to determine the company's real net worth.

4. Consider operating expenses. All entities have operating expenses whether it's a corporation, small business or an individual. Children selling lemonade on a sunny day is a common sight. At the end of they day they are anxious to tally their sales. However, in order to recognize true profit they must subtract their operating expenses or cost of doing business. Items such as lemonade, sugar, cups and posters used for advertising are considered operating expenses.

5. Explain earnings per share. Corporations sell shares of stock or ownership in a company in order to raise money for future production. Investors buy these shares in hopes of earning interest income on their investment. Earnings per share can be determined by dividing net profit by the number of shares outstanding. However, most companies elect to reinvest their earnings into the business and pay dividends to investors periodically.