The Securities and Exchange Commission requires certain disclosures of public companies, including financial documents such as the income statement. Investors like to see a business's income statement because it lists the company's "bottom line" for a specified period, which may be either a profit or loss. The income statement not only helps investors and stockholders, but also company management and business owners. When preparing the income statement, you must place certain expenses on certain lines, which keeps it organized and allows you calculate the correct numbers.
Cost of Goods Sold
After sales revenue has been listed on the income statement for the accounting period, you list the cost of goods sold or cost of sales. The cost of goods sold generally represents production-related expenses or the expenses associated with creating revenue. For example, manufacturers might list the cost for raw expenses, while wholesalers and retailers typically include the cost of merchandise for resale. On the income statement, you subtract the cost of goods sold from sales revenue -- at the top of the form -- to arrive at your gross profit.
Also called the selling, general and administrative expense, the operating expenses include fixed, variable and discretionary expenses associated with operating the business for the accounting period. Each business has its own operating expenses, but examples include utilities and rent, depreciation and salary expenses. Advertising expense and sales commission expense accounts may also be listed, along with other overhead costs that do not fall into other categories. All the operating expenses are tabulated and then totaled on a separate line. You subtract the total operating expenses from the gross profit to arrive at a figure called the net income before taxes or income from operations.
A company lists interest expense on the line after the net income or income from operations. This expense basically equals the interest the business paid for borrowed money, such as financing and loans or other long-term debt. On a separate line, you also can list interest income, such as money earned from interest-earning savings accounts and money market funds. You can either list interest income separately or combine it with interest expense on the same line. When you subtract interest expense from the net income, it equals your earnings before taxes.
The final expense listed on the income statement simply equals the amount of money the business paid in taxes or will pay in the future on its earnings before taxes. In certain cases, the business can also reserve a place before or after the income tax expense line for "extraordinary" expenses, which include one-time costs such as lawsuit settlements. When you subtract the extraordinary expense and income tax expense from the earnings before taxes, it equals the business's net income, or net loss if the result is a negative number.