How to Calculate Yearly Income Statements
The income statement records the revenues, expenses and profits of a business. It is also known as the profit and loss statement, or P&L statement. Management, financial analysts and investors review current and historical income statements to assess a company's ability to drive revenue growth, control expenses and produce profits. The income statement shows the revenues, expenses and profits or losses from the core and non-core operations of the business.
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Instructions
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Calculate the sales of your core products and services. The non-core revenues include interest income from cash investments. Assume that you sold $100 worth of goods in the reporting period and received $5 of interest income.
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Calculate the expenses. These will include the cost of goods sold, overhead expenses, depreciation and amortization expenses, interest expenses and taxes payable. The cost of goods sold is the cost to make or acquire your products. Fixed assets are depreciated, and intangible assets and debt payments are amortized annually according to accounting guidelines. Overhead expenses include selling, general and administrative expenses. Assume that your cost of goods sold was $65, overhead was $10, depreciation and amortization were a total of $5, interest expenses were $5 and taxes payable were $5 in the period.
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Calculate the gross profit by subtracting the cost of goods sold from your core revenues. For this example, gross profit for the period is equal to $100 minus $65, or $35.
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Calculate the operating profit by subtracting the overhead expenses from the gross profit. To continue with the example, operating profit is equal to $35 minus $10, or $25. This is also known as earnings before interest, taxes, depreciation and amortization, or EBITDA. The earnings before interest and taxes, or EBIT, are equal to EBITDA minus depreciation and amortization. For this example, EBITDA is equal to $25, and EBIT is equal to $25 minus $5, or $20.
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Calculate the net income. Start with the EBIT. Add or subtract non-operating or non-core items such as interest income, and gains or losses from fixed asset dispositions. Subtract interest expenses and taxes payable. The result is your net profit or net income. Assume that the interest income of $5 was the only non-core item in the period. To conclude the example, net profit is equal to EBIT plus interest income minus interest expense minus taxes payable, or $20 plus $5 minus $5 minus $5, or $15.
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Tips & Warnings
Most businesses have automated systems for tracking their revenues and expenses on a daily basis. If you do not, you can prepare the income statement from the general ledger, which records transactions for all your accounts, or from bank records, sales receipts and customer invoices.
References
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