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How to Make an Income Statement: Example & Analysis

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  • 0:00 What Is an Income Statement?
  • 1:00 Example
  • 4:44 Analysis
  • 5:22 Lesson Summary
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Lesson Transcript
Instructor: Ian Lord

Ian has an MBA and is a real estate investor, former health professions educator, and Air Force veteran.

This lesson will demonstrate how an income statement is created. Business owners can use it to understand how the business is performing and point out areas for improvement.

What Is an Income Statement?

Bob owns a small custom furniture business. After his first full calendar year in business, he would like to see how he is doing financially. More specifically, he would like to see how profitable his business was over the last year. Let's walk Bob through creating an income statement and show him how it suits that purpose.

Definition

An income statement is one of the major financial statements and is also known as a profit and loss statement. It is used to report the performance of a business for a specific period of time and will allow Bob to see at a glance how much money the business brought in and how much was put towards expenses. The convenient thing about an income statement is that Bob can see the running total for the profit or loss as each expense is deducted from his revenues. The size and detail of the income statement will vary from business to business, but they all work on the same principle of starting with revenues followed by a methodical subtraction of categories of expenses.

Example

Let's go through Bob's income statement to see what he's working with.

Each individual item of information is expressed on a single line of the income statement. The first thing we need to know is how much money Bob made from selling furniture just in that year, which is his revenue of $500,000. Bob has calculated his total cost of goods sold as $200,000. This amount includes his expenses, such as materials, rent, employee labor, and tool maintenance. He also spent $25,000 on miscellaneous office expenses. Because Bob's business depends on a number of expensive tools, he also needs to account for the depreciation of those tools, which this past year was $25,000.

So let's go through line by line:

Line 1: Income: $500,000

Line 2: Cost of Goods Sold: $200,000

Line 3. Misc. Expenses: $25,000

Line 4: Depreciation: $25,000

Line 5: Total Expenses: $250,000

Subtracting Line 5 from Line 1 gives us Bob's operating profit. This will be our Line 6.

Line 6: Operating Profit: $250,000

But we're not through yet! Bob also has to account for interest and taxes. Last year he spent $10,000 in interest paying off a loan he used to get the business up and running. Subtracting Line 7 from Line 6 gives the earnings before interest and taxes (EBIT). He also spent $90,000 total in taxes at the federal, state, and local level, which also includes employee payroll taxes.

Line 7: Interest: $10,000

Line 8: EBIT: $240,000

Take out the taxes shown on Line 9 and we get the earnings that are available to be taken out in payments to the owners or kept as retained earnings on Line 10.

Line 9: Taxes: $90,000

Line 10: Available Earnings: $150,000

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