What is the purpose of an income statement for a retail business? Which statement format do you choose? What are the benefits and challenges of your statement choice for each stakeholder group?
An income statement is one of three company’s core financial statements. The others are the balance sheet and cash flow statement.
There are two types of income statements.
- The single-step income statement
- The multi-step income statement
The purpose of an income statement for a retail business
This statement’s main aim is to show the company’s profit and loss over a given period. The income statement sums up a company’s total expenses and revenues for a specific period (Franklin et al., 2019).
Since it shows a firm’s profitability for a period, this statement is also referred to as a profit and loss statement. It focuses on the income and expenses incurred during a specific period, such as quarterly or annually.
What is a simple income statement?
The simple income statement is also referred to as the single-step income statement. It uses a single equation to calculate the firm’s net income.
Net Income = (Revenues + Gains) – (Expenses + Losses)
Format and preparation of simple income statements
Revenue and gains equate to the total money an entity receives from the sale of services and goods in a given period, together with the capital gains. Sometimes it is referred to as the top line because it appears as the first item on top of the statement.
Expenses and losses include all the money expended by an entity to maintain and carry out operations. All expenses are listed under a single common heading. The simple income statement does not differentiate between non-operating and operating expenses, including rent, materials, marketing, and depreciation (Franklin et al., 2019).
Pre-tax profit is arrived at by subtracting the expenses from the revenue. Net income is arrived at by subtracting the total expenses, including taxes, from the total revenue.
Benefits and challenges of a simple income statement for stakeholders
- It’s easier to prepare, use and understand
- The company does not need to hire an expert to manage the company records.
- It lacks sufficient information for investors to assess the company’s health other than using its net income.
- It does not give any data about gross or operating margins, making it challenging to identify expense sources.
- It is difficult to make accurate future financial projections.
Analysis of the income statement may reveal if sales are improving and if the return on equity expands. These statements are useful for investors and lenders because they show the firm’s performance and how effective the management is.
Book suggestions to read about the purpose of an income statement for a retail business:
Franklin, M., Cooper, D., & Graybeal, P. (2019). Principles of Accounting, V1. OpenStax.
P, A., & E, M. (2010). Management and Cost Accounting. Financial Times Prentice Hall Harlow.
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