Income Statement - Introduction

The income statement is a historical record of the trading of a business over a specific period (normally one year). It shows the profit or loss made by the business – which is the difference between the firm's total income and its total costs.

The income statement serves several important purposes:

• Allows shareholders/owners to see how the business has performed and whether it has made an acceptable profit (return)
• Helps identify whether the profit earned by the business is sustainable ("profit quality")
• Enables comparison with other similar businesses (e.g. competitors) and the industry as a whole
• Allows providers of finance to see whether the business is able to generate sufficient profits to remain viable (in conjunction with the cash flow statement)
• Allows the directors of a company to satisfy their legal requirements to report on the financial record of the business

The structure and format of a typical income statement is illustrated below:

The lines in the income statement can be briefly described as follows: