# What Is An Income Statement? Published: 18 Jan 2021 | Last updated: 07 Feb 2025 Author: Treelife Practice area: Finance Source: https://treelife.in/finance/what-is-an-income-statement/ ## Summary - An income statement is a financial statement that shows a company's income and expenditures over a given reporting period. - The income statement is also known as a profit and loss statement, statement of operations, statement of financial result or income, or earnings statement. - Together with the balance sheet and cash flow statement, the income statement helps assess the overall financial health of a business. - Key components of an income statement include revenue, expenses, income before taxes, net income, and earnings per share (EPS). - Revenue is the amount of money a business takes in during a reporting period, while expenses are the amount it spends during that same period. - Net income is calculated as income before taxes minus taxes, and earnings per share is net income divided by the total number of outstanding shares. - Vertical analysis reads down a single column of the income statement, expressing each line item as a percentage of a base figure to compare relative proportions. - Horizontal analysis compares changes in income statement figures across multiple reporting periods, either in absolute terms or as percentages, to track growth trends. - Reviewing income statements alongside the balance sheet, cash flow statement, and annual report helps business owners decide whether to increase revenue, cut costs, or both to improve profitability. --- An income statement helps business owners decide whether they can generate profit by increasing revenues, by decreasing costs, or both. It also shows the effectiveness of the strategies that the business set at the beginning of a financial period. The business owners can refer to this document to see if the strategies have paid off and they can come with the best solutions to yield more profit. **What is an Income Statement** An income statement is a financial statement that shows you the company’s income and expenditures. It also shows whether a company is making profit or loss for a given period. The income statement, along with balance sheet and cash flow statement, helps you understand the financial health of your business. The income statement is also known as a profit and loss statement, statement of operation, statement of financial result or income, or earnings statement. **Components of an Income Statement** While all financial data helps paint a picture of a company’s financial health, an income statement is one of the most important documents a company’s leadership team and individual investors can review, because it includes a detailed breakdown of income and expenses over the course of a reporting period. This includes: - Revenue: The amount of money a business takes in during a reporting period - Expenses: The amount of money a business spends during a reporting period - Income before taxes: All [revenue](https://treelife.in/finance/difference-between-capital-expenditure-and-revenue-expenditure/) less expenses but before taxes - Net income: Income before taxes less taxes - Earnings per share (EPS): Division of net income by the total number of outstanding shares Above categories may be further divided into individual line items, depending on a company’s policy and the granularity of its income statement. **Analysis of an Income Statement** There are two methods commonly used to read and analyze an organization’s financial documents: vertical analysis and horizontal analysis. The difference between the two is in the way a statement is read and the comparisons you can make from each type of analysis. ***Upright Analysis*** It refers to the method of financial analysis where each line item is listed even as a percentage of a base figure. In short, it’s the process of reading down a single column of data in a financial statement, determining how individual line items relate to each other (e.g., showing the relative size of different expenses, as line items may be listed as a percentage of operating expenses). This type of analysis makes it simple to compare financial statements across periods and industries, and between companies, because you can see relative proportions. It also helps you analyze whether performance metrics are improving. ***Parallel Analysis*** It reviews and compares changes in the amounts in a company’s financial statements over multiple reporting periods. It’s frequently used in absolute comparisons, but can be used as percentages, too. Horizontal analysis makes financial data and reporting consistent along with growth comparison to it’s competitors. **Conclusion** In conjunction with the cash flow statement, balance sheet, and annual report, income statements help company leaders, analysts, and investors understand the full picture of a business’s operational results so they can determine its value and efficiency and, ideally, predict its future trajectory. Financial analysis of an income statement can reveal that the costs of goods sold are falling, or that sales have been improving, while return on equity is rising. Income statements are also carefully reviewed when a business wants to cut spending or determine strategies for growth. 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