Financial statement users, such as investors and creditors, examine income reported on the income statement. Operating income, net income and gross income refer to different pieces of information that must be understood by the users of the income statement. Depreciation refers to a non-cash expense of the company and reduces the company's income.
The Income Statement
All measurements of income show up on the income statement. The income statement determines the profitability of the company and communicates this information to management, creditors and investors. The basic income statement follows the format of revenues minus expenses equal net income. The multiple step income statement separates the income statement into different sections, each noted by a different type of income measurement.
Gross income shows up first on the multiple step income statement. First, the accountant lists net revenues at the top of the statement. This includes revenues from sales adjusted by sales returns and sales discounts. Next, the accountant determines the cost of goods sold. Cost of goods sold refers to the purchase price, installation charges and freight costs for the items that were sold to customers during the period. It omits the cost of items remaining in ending inventory. The accountant subtracts the cost of goods sold from the net sales to determine gross income.
Operating income demonstrates the profitability of a business, taking only the business’ operation into account. After calculating the gross income, the accountant determines the operating costs of running the business. These include selling expenses and administrative expenses. Selling expenses include store supplies, promotional materials, sales commissions and depreciation on fixtures in the showroom. Administrative expenses are office salaries, training costs, office supplies and depreciation on office equipment. The accountant subtracts the operating costs from the gross income to determine the operating income.
Many businesses earn income outside of their primary business operations. These include rent revenue or interest income. Most businesses also incur expenses beyond their primary operation, such as interest expense. Because these revenues and expenses occur outside the primary business operation, the accountant reports them separately from the operating revenues and expenses. After reporting the operating income, the accountant adds these revenues and subtracts the expenses to arrive at the company’s net income.