Income Statement

An income statement - also referred to as a profit and loss statement (P&L), revenue statement, statement of financial performance or earnings statement is one of the four financial statements of a company (according to GAAP or IFRS financial accounting standards).  It shows the company’s revenues (‘top line’) and expenses and resulting from these profits or losses (‘net income/loss’ ‘bottom line’) during a particular period (usually a year or a quarter).

Income statement displays the revenues recognized for a specific period, and the cost and expenses charged against these revenues, including various expenses, depreciation and amortization of various assets, interest payments and taxes.

The purpose of the income statement is to show managers and investors whether the company made or lost money during the period in question. It must be noted, however, that corporate income statement reports profits and losses on the accrual basis, not cash basis.

Therefore, these profits or losses may have nothing to do with actual corporate cash flows. Sometimes a profitable company (according to its income statement) can actually be broke with no money in its bank accounts. It happens when a company in question has all its profits tied up in working capital (usually accounts receivable) and therefore can’t pay its expenses.

This section will cover only the basics of income statement analysis which are sufficient in most CBA cases. For guidelines on a more in-depth analysis, you will need to consult one of the many books on detailed financial statement analysis.

Neither GAAP no IFRS specify the detailed structure of P&L – they only provide rather broad guidelines. Therefore, you can – and must – structure your P&L so that it (1) accurately reflects the specifics of your business in terms of generating revenue and incurring costs and (2) allows you to perform the most efficient and valuable analysis of your P&L KPI.

In this guide, I will cover the most general P&L structure that you will need to adapt to your specific business situation.