What is an Income Statement
What is an Income Statement
The income statement tells you the bottom line - the net income. It answers what the profit or loss is of a business or investment property. The income statement is a summary of financial performance over a specific period of time. Income statements are generally prepared annually, quarterly, or at other intervals as needed for business, accounting and tax purposes.
It is important to have a basic understanding of income statements. In commercial real estate, income statements are often used to evaluate investment property performance. It indicates the profitability of an investment to the investor. Property owners may request an income statement of a tenant to assess their ability to pay rent. A bank will want to see an income statement to help determine a company’s or investor’s ability to pay back a debt or commercial mortgage.
The income statement is summarized by the following formula:
Revenue – Expenses = Income
A simplified example format of an income statement follows:
| Revenue |
1,000,000 |
| - Cost of Sales |
400,000 |
| Gross Income |
600,000 |
| |
|
| - Operating Expenses |
200,000 |
| Operating Income |
400,000 |
| |
|
| Other Expenses |
|
| - interest expense
|
75,000 |
|
|
| Income Before Taxes |
325,000 |
| - Income Taxes |
125,000 |
| Net Income |
200,000 |
Revenue
Revenue is the top line. Revenues may be the sales revenue of a business, or the leasing revenue from an income property. Cost of Sales or Cost of Goods Sold is deducted from Revenue to calculate the gross income (gross margin, gross profit).
Revenue – Cost of Goods Sold = Gross Profit
Gross Margin
The gross margin is the amount of money left over to pay the remaining operating and administrative expenses. Once these operating and administrative expenses are deducted from gross margin, the remaining amount is the operating income (or operating profit).
Gross profit – operating costs = operating profit
Expenses
Some expenses don’t really contribute to the operation of the business or production of sales. These expenses are deducted next. Once these expenses, such as interest expense, are deducted, the result is income before taxes (or earnings before taxes).
Net Income
We can now deduct income taxes to get to the bottom line – Net Income (or Net Earnings). This number lets us know if the business or investment is either making a profit, or losing money.