An income statement explains how a business performs financially over a period of time. This lesson introduces its purpose and the main categories used to report revenues and expenses.
A balance sheet reports a firm’s financial position at a specific point in time. An income statement summarizes revenues and expenses over a period—such as a month, quarter, or year—and shows whether the firm earned a profit or incurred a loss during that period.
All flashcards
How does an income statement differ from a balance sheet?
An income statement summarizes revenues and expenses over a period and reports profit or loss. A balance sheet shows financial position at a specific point in time.
What are gross sales and net sales?
Gross sales are the total dollar amount of sales. Net sales are gross sales after subtracting sales discounts and returns and allowances.
What is cost of goods sold?
COGS is the cost of buying or producing the goods or services that the business sold during the period.
How is gross profit calculated?
Gross profit equals net sales minus cost of goods sold. It is what remains after direct product costs but before operating expenses.
What are the two main types of operating expenses?
Selling expenses support sales and distribution; general and administrative expenses support overall business operations.
Quiz questions
How is net profit calculated after net profit before taxes has been determined?Answer: Subtract income taxes from net profit before taxes.
What does the bottom line of an income statement represent?Answer: Net profit or net loss after expenses and taxes.
When does a business incur a net loss?Answer: When expenses exceed revenues for the period.
Why can accounting profit differ from a business’s cash position?Answer: Revenue may be recorded when earned before the customer pays.
Which financial statement summarizes cash inflows and outflows?Answer: The statement of cash flows.
Based on Introduction to Business 2e by Lawrence J. Gitman, Carl McDaniel, Amit Shah, Monique Reece, Linda Koffel, Bethann Talsma, James C. Hyatt (OpenStax), licensed CC BY 4.0. Adapted into a summary, flashcards and quizzes.