Income Statement Analysis By Function

Income statement analysis investors can use income statement analysis to calculate financial ratios that can be used to compare the same company year over year or to compare one company to another.

Income statement analysis by function. The purpose of an income statement is to show a company s financial performance over a period. Accountants create income statements using trial balances from any two points in time. The analysis of the income statement involves comparing the different line items within a statement as well as following trend lines of individual line items over multiple periods. The income statement also known as the profit and loss p l statement is the financial statement that depicts the revenues expenses and net income generated by an organization over a specific.

Cost of goods sold selling costs administrative costs and other expenses. Within an income statement you ll find all revenue and expense accounts for a set period. It tells the financial story of a business s activities. For example you can compare one company s profits to its competitors by examining its gross profit margin operating profit margin and net profit margin.

The income statement of a business takes all the expenses of the business and subtracts them from the revenues and other incomes of the business for the period to reach the profits of the business. When only expenses that are directly attributable to the revenues of the business also known as the cost of sales are subtracted from the revenues the profit calculated is known as the gross profit of the business. An income statement by nature method is the one in which expenses are disclosed according to their nature such as depreciation transports costs rent expense wages and salaries etc. This analysis is used to understand the cost structure of a business and its ability to earn a profit.

An income statement by function is the one in which expenses are disclosed according to different functions they are spent on cost of goods sold selling administrative etc this method allows us to calculate gross profit and operating profit within the income statement and therefore is usually used in the multi step format of income statement. The income statement is used by the owners and any other stakeholders of the business to determine whether the business is profitable or not. The purpose of the income statement is to show managers and investors whether the company made or lost money during the period being reported.