For example, the year-end statement that is prepared annually for stockholders and potential investors doesn’t do much good for management while they are trying to run the company throughout the year. It’s important to note that there are several different types of income statements that are created for different reasons. Income Statement Purpose What is an Income Statement Used For? For example annual statements use revenues and expenses over a 12-month period, while quarterly statements focus on revenues and expenses incurred during a 3-month period. Unlike the balance sheet, the income statement calculates net income or loss over a range of time. Operating income is calculated by subtracting operating expenses from the gross profit.
Gross profit is calculated by subtracting cost of goods sold from net sales. These two calculations are best shown on a multi-step income statement. The income and expense accounts can also be subdivided to calculate gross profit and the income or loss from operations. This calculation shows investors and creditors the overall profitability of the company as well as how efficiently the company is at generating profits from total revenues. The income statement calculates the net income of a company by subtracting total expenses from total income. The income statement is the first financial statement typically prepared during the accounting cycle because the net income or loss must be calculated and carried over to the statement of owner’s equity before other financial statements can be prepared. The income statement, also called the profit and loss statement, is a report that shows the income, expenses, and resulting profits or losses of a company during a specific time period.