What are financial statements?
The 3 main financial statements are:
Income statement; and
Cash flow statement.
What is an income statement?
Also referred to as the Statement of Income or Profit or Loss. The income statement is a snapshot of the company’s Profit or Loss for a Period of Time.
It’s important to note that the income statement shows revenue earned and expenses incurred and not cash receipts and disbursements. For example, a business that makes a sale of USD 100 for credit would record a Revenue of USD 100 and a Receivable of USD 100. In this example, no cash is received yet so the cash flow statement would record cash inflow of nil, but the income statement would still record a sale of USD 100.
The income statement shows:
Revenue (also sales, income etc.)
Money generated from selling products or services to customers.
Cost of Goods Sold (COGS)
Money spent manufacturing goods or services to customers.
For example, a restaurant would include all direct costs of food purchased, salaries of cooks and packaging costs.
Expenses (general, administrative etc.)
Indirect expenses including indirect wages, rent, telephone, internet, marketing and advertising etc.
Let’s look at the following formula.
Net Profit or Net Loss = Revenue - COGS - Expenses
Period of time
It’s important that you always keep in mind the ‘period of time’ element when reviewing your income statement.
For example, the income statement of company XYZ for the year ended 31 December 2017 is a snapshot of the company’s profit or loss for that particular year, i.e. from 1 January 2017 to 31 December 2017. The resulting net profit or loss at the end of the year is transferred to the balance sheet under retained earnings. Company XYZ would then start 2018 with zero revenue, COGS and expenses.