Commercial Real Estate Encyclopedia

Accounting and Finance >> The Income Statement

Analyzing an Income Statement >>

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 companys or investors 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 dont 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.



        
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