Understanding
the Income Statement

The income statement represents the flow of business activity for a particular accounting period, for example a month, a quarter, or a year. This flow of business activity is categorized into revenue and expenses, which determines net income.

The earnings statement is mainly known for getting to the bottom line: net income. But the earnings statement is also a valuable source for spotting trends, understanding the strengths and potential weak spots of your business, and the story behind the accounting earnings.
Figure 1-1 is an earnings statement for Sunny Sunglasses Shop. The accounting period is for the year 2007.

Sunny Sunglasses Shop made a profit, after all expenses, of $15,283. This is profit that directly builds the value, or equity, of the business! See why with accounting formulas here.

The company is off to a good start. But net income does not necessarily translate into cash flow under the Accrual Accounting Method.

Accounting Basics: Accrual and Cash Accounting.

It is essential that other aspects of the business, such as debt management and cash flow, remain healthy with net profits. The financial statements, used together, provide information for all these aspects of the business.

Notice that the earnings statement separates profit in three areas: gross profit, net operating income, and net income. Click the links for an in depth analysis of each.

Gross Profit

Net Operating Income

Net Income

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