Reviewed by Oct 05, 2020| Updated on
An income statement is one of the three essential financial statements used for reporting the financial performance of a firm over a particular accounting period, with the other two key statements being the cash flow statement and the balance sheet.
Often known as the profit and loss statement or revenue and cost statement, the income statement focuses mainly on the company's profits and expenditures for a given period of time.
The income statement focuses on the four main elements—revenue, spending, profit, and loss. It does not cover refunds (the money earned by the company) or cash payments/disbursements (the money paid by the company).
It begins with the sales data, then works down to measure the net profit, and eventually, earnings per share (EPS). Essentially, it provides an explanation of how the company's net revenue transforms into net income (profit or loss).
While the main aim of an income statement is to convey to the stakeholders the details of the company's performance and operating practices, it also offers comprehensive insights into the company's internals for comparison across different companies and sectors.
These statements are often more regularly prepared at department and division level to obtain deeper perspectives from the management of the organisation to track the success of different operations during the year, while these interim reports that remain internal to the organisation.
On the basis of income statements, management may take decisions, such as expanding to new geographies, driving sales, raising manufacturing capacity, raising usage or selling assets directly, or shutting down a department or product line. Competitors may also use these to gain insights into a company's success parameters and focus areas as R&D spending increases.
Creditors can make limited use of income statements as they are more concerned with potential cash flows of a business rather than its past profitability.