Familiarity with the income statement format is important for anyone who wants to succeed in business studies and a business career. You need to be familiar with the format to the point of being able to write down the format from memory.
The income statement, which is also referred to as profit and loss statement (P&L), is one of the most important financial statements. Other important financial statements include the balance sheet, cash flow statement and statement of changes in equity.
A good way to compare the income statement, balance sheet (financial position statement) and cash-flow statement is to think of a river leading to a dam. The income statement and a cash-flow statement record the movement of money over a specific period of time. It is similar to recording the volume flowing down a river over specific period. The balance sheet (financial position statement) is the dam. Everything collects there.
The income statement calculates if the business generated a profit or incurred loss during a specified financial period. In other words, it shows profitability of the organization over a certain period.
If profit was generated during then the bottom line of the statement will be a net profit after taxes, which is also called the net income. The general format is presented below.
General income statement format
LESS: Cost of goods sold*
= Gross profit
LESS: Operating expenses
= EBIT (earnings before interest and tax/operating profit)
= Net profit before tax
= Net profit after tax
LESS: Preferred stock dividends
= Earnings available for common stockholders
To calculate Cost of goods sold, one needs to follow the steps:
Less: Closing inventory
= Cost of goods sold