What is an Single Step Income Statement?
An income statement is considered as one of the three major financial statements used to report a company’s financial performance at the term of the specific accounting period. The other two key statements are the statement of cash flows and the balance sheet in Single Step Income Statement.
It is also known as the statement of revenue and expense or the profit and loss statement; the income statement can primarily focus on its expenses and revenues during a particular period.
Understanding the income statement
The income statement is considered an important part of a company’s performance reports submitted to the SEC, i.e. Securities and Exchange Commission. While when we see a balance sheet provides a snapshot of a company’s financial report as of some particular date, the income statement reports income through a particular period, and its heading indicates the duration. This may read as “For the (fiscal) year/quarter ended September 30, 2018.”
The income statement also focuses on four key items expenses, revenue, gains, and losses. It also doesn’t differentiate between cash and non-cash receipts (sales in cash versus sales on credit) or cash versus non-cash payments/disbursements (purchases in cash versus purchases on credit).
It starts with sales information, and then it also works down for computing the net income and eventually the earnings per share (EPS). It also gives an account of how the company can realize the net revenue by getting transformed into net earnings (Profit or loss).
Revenues and Gains
The following have been covered in the form of the income statement, though its format that may vary depending upon local regulatory requirements. The diversified scope of a business and the associated with the operating activities:
Revenue that is realized through primary activities can be often referred to as operating revenue. For a company that is manufacturing a product, or for a retailer, wholesaler or distributor those involved in selling that product, the revenue from primary activities refers to revenue achieved from the product’s sale. Similarly, for a company (or its franchisees) offering services, revenue from primary activities refers to the revenue or fees earned in exchange for offering those services.
Revenues can also be realized through non-core, secondary business activities often referred to as non-operating recurring revenues. These revenues can be a source from the earnings which are from the outside of the purchase or a sale of a goods and services, and it may be included:
Income from the interest which is earned on business capital lying in the bank.
Rental income from the business property.
Income from strategic partnerships like receipts of royalty payment or income from an advertisement display placed on business property.
Gains in Single Step Income Statement
It is also called other income, which are gains that indicate the net money made from other activities, like the selling of long-term assets. These also include the net income realized from one-time non-business activities, like sales of its unused land, old transportation van, or a subsidiary company.
Revenue shouldn’t be confused with receipts. Usually, revenue can be accounted for when sales have been made or services that are delivered. Receipts are the cash that is received and are accounted for when the money is received. For instance, a customer may take goods or services from any company on September 28, accounting for revenue in September. According to the owing of his good reputation, the customer might be given a 30-day payment window. It will also give him a time till October 28 for making the payment, which is when the receipts have been accounted for.
Expenses and Losses
The cost for any business to continue operation is known as an expense. Some of these expenses that may be written off on a tax return if they meet the IRS guidelines.
Primary Activity Expenses-
All expenses incurred for earning the average operating revenue are linked to the primary activity of the business. They mainly include the selling, cost of goods sold (COGS), depreciation or amortization, general and administrative expenses (SG&A), research and development (R&D) expenses. Typical items you make up the list are mainly employee wages, sales commissions, and utilities like electricity and transportation.
Secondary Activity Expenses-
All expenses are linked to the non-core type of business activities, like interest paid on loan money.
Losses as Expenses-
All expenses that go towards a loss-making of sale of long-term assets, or expenses towards lawsuits one-time or any other unusual costs,.
While primary revenue and a expenses offer insights into how well the main company’s core business is performing. The secondary revenue and expenses account for its involvement and expertise in just managing the ad-hoc. The non-core activities.
They are comparing to income from a sale of manufactured goods. A substantially about to high-interest income from being money lying in a bank indicates that one business may not be using the available cash. They are using cash at full potential by expanding the production capacity or facing challenges by increasing its availability in market share competition.
A recurring rental income gained by hosting billboards at the company factory along a highway indicates that management capitalizes upon the available resources and assets for additional profitability.
Income Statement Structure
Mathematically, the Net Income can be calculated that is based on the following:
Net Income = (Revenue + Gains ) – (Expenses + Losses)
However, real-world companies often operate globally, have diversified in business segments by offering as a mix of products and services, and a frequently get involved in acquisitions, mergers, and strategic partnerships. Such a wide array of company operations, diversified set of particular expenses, various business activities, and its need for reporting in a standard format. As per regulatory compliance, that leads towards complex and multiple accounting entries in the income statement.
List of companies follows up.
Multiple-Step Income Statement, which is segregated in the operating expenses, operating revenues, and gains from the available non-operating revenues, non-operating expenses, and losses, and offers many more details through the income statement. Essentially, the different profitability can also be measured in a multiple-step income statement reported at four different levels in business operations like gross, operating, pre-tax and after-tax.
As we should shortly see in the following example, this segregation also helps identify how the income and profitability are moving or changing from one level to another. For instance, the high gross Profit that is lowering the operating income also indicates higher expenses. In contrast, higher pre-tax Profit and lower post-tax Profit indicate loss of earnings to taxes and other one-time, unusual expenses.
Reading of Standard Income Statements
This standard format’s main intention is to calculate the profit/income at each subhead of revenue and operating expenses. Account for mandatory interest, taxes, and other non-recurring, one-time events to arrive at the net income that applies to common stock. Though these calculations also involve simple additions and a subtractions. The order in which various type of entries appear in the statement and their relations often getting complicated and repetitive.
So, let’s understand further through these numbers for better understanding.
Revenue Section in Single Step Income Statement
The first section is titled “Revenue,” which indicates Microsoft’s Gross (annual) Profit for the particular, fiscal year ending June 30, 2018. was 72.007 billion USD. It has been arrived at by deducting the cost of revenue (38.353 billion USD) from the total revenue (110.360 billion USD), which the technology giant has realized during its fiscal year. Around 35% of a Microsoft’s total sales went toward the costs for a revenue generation, while a similar type of figure for Walmart was around as 75% (373.396 USD/500.343 USD). It indicates that Walmart incurred much higher costs compared to Microsoft to generate comparable sales.
The next section is also called “Operating Expenses,” which again takes into account the cost of revenue (38.353 billion USD) and total revenue (110.360 billion USD) to arrive at the reported figures. As Microsoft spent 14.726 billion USD on research and development (R&D) and 22.223 billion USD on Selling General and Administrative Expense (SG&A), the Total Operating Expenses is computed by summing all these figures (38.353 USD + 14.726 USD + 22.223 USD) = 75.302 billion USD.
Reduction in the total operating expenses from total revenue also leads to Operating Income (or Loss) as (110.360 USD – 75.302 USD) = 35.058 billion USD. This figure also represents the Earnings before Interest and Taxes (EBIT) for its fundamental business activities, and it is again used for later deriving the net income.
Comparing the lined items also indicates that Walmart is not spending anything on R&D and had higher SGA and total operating expenses than Microsoft.
Income from Continuing Operations
The next section has been titled “Income from Continuing Operations,” adding net other income or expenses (like one-time earnings), interest-linked expenses, and applicable taxes to arrive at the Net Income.
From Continuing Operations (16.571 billion USD) for Microsoft, 60% higher than Walmart (10.523 billion USD).
After discounting for various non-recurring events, the amount of net income applies to common shares that have been arrived. Microsoft had a 68% higher net income of 16.571 billion USD than Walmart’s 9.862 billion USD.
The earnings per share can be computed by dividing the net income figure by the value of weighted average shares that are outstanding. With 7.7 billion USD outstanding shares of Microsoft, its Earnings Per Share comes to 16.571 billion USD/7.7 billion USD = 2.15 USD per share. With Walmart having 2.995 billion USD outstanding shares, its EPS comes to 3.29 USD per share.
Uses of Income Statements
Though the primary purpose of an income statement is to convey information of the company’s profitability and business activities to the shareholders, it also provides in-depth details about the insights into the company’s internals to perform comparisons across different sectors and businesses.
Such statements can also be prepared more frequently at the department- and segment levels to gain as deeper insights by the company management for checking the progress of various operations throughout the year. However, such interim reports may remain internal to the company.
Based on various income statements, management can decide how to expand to new geographies, pushing sales to heights, increasing production capacity, increment in utilization or outright sale of assets, or closing down a department or product line. Competitors might also be using them to gain insights about the company’s success parameters and focus areas as increasing R&D spends.
Creditors may be finding limited use of income statements as they have been more concerned about future cash flows than past profitability. Research analysts can also use the income statement for comparing quarter-on-quarter and year-on-year performance.
One can also infer whether there is a company’s efforts in reducing the cost of sales. It helped it improve profits over time or whether the management managed to keep a tab on operating expenses without compromising profitability.
Though the retail giant is beating the technology leader in terms of annual Earnings Per Share, Microsoft had a been lower cost for higher net income from continuing operations, generating equivalent revenue, and higher a net income applicable to a common shares than Walmart.
An income statement is considered one of the three financial statements and a balance sheet and statement of cash flows that reports a company’s financial performance over a specific accounting period.
Total revenue is the sum of operating revenues and non-operating revenues, while total expenses can also include those are incurred by primary and a secondary activities.
Revenues are not counted as receipts. Revenue can be earned and reported on the income statement. Receipts like cash received or paid out are not.
An income statement also provides valuable insights into a company’s operations. The efficiency of its management, under-performing sectors and its a performance relative to industry peers.
The Bottom Line
An Single Step Income Statement also provides valuable insights into various aspects of a business. It also includes a company’s operations, the efficiency of its management, the possible leaky areas that may be eroding profits, and whether the company is performing in line with industry peers.
Frequently Asked Questions
What is an Income Statement?
An income statement is a one type of financial statement that will shows you the company’s income and a expenditures. It will also shows whether a company is making a profit or loss. It is for a given Financials period. The income statement, along balance sheet and a cash flow statement, helps you understand the financial health of your business.
The income statement can also be a profit and loss statement, statement of operation, financial result or income, or earnings statement.
What does an Income Statement show?
An income statement is mainly a report that indicates how much revenue a company earned over a specific period (usually for a year or some part of a year). An Single Step Income Statement can also show the costs and expenses which are associated with earning that revenue. It tells you how much the company earned or lost over the period.
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