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As a business owner it is important that you regularly review your financial reports to remain well-informed on the performance of your business. 

One of the important financial reports is the Income Statement to assist you in understanding critical elements related to the overall health of your business.

The income statement reports three main financial elements of a business for a certain time period. The information includes revenues, expenses, and the bottom line - the profit or loss for the specific period.

Your Income Statement Reflects the Health of Your Business

Elements of an Income Statement

Sales Revenue

The opening line and most crucial part of an income statement is the sales revenue.

Sales revenue is the income a business earns from the sale of services and goods to the public. Due to the position of the sales revenue on the income statement, its also referred to as the "top line".

Cost of Goods Sold / Services Rendered

The following line on an income statement is the cost of goods sold expense.

Cost of goods sold expense have three methods of reporting.

How the cost of goods sold expense is reported in an income statement can make a considerable impact on the reported bottom line.

Inventory Write-Downs

Additional items in an income statement include inventory write-downs.

On a regular basis a business should review its inventory to establish any losses due to deterioration, theft and damage, and to use the lower of cost or market (LCM) rule.

Bad Debts

Bad debts are also an essential part of the income statement.

Bad debts are money owed to an entity by customers who bought on credit (accounts receivable), but are not likely to be paid.

Further Elements of an Income Statement

Certainly profit and cost of goods sold expense are the two most critical components of an income statement, or at least they're what business owners will look at first.

But an income statement is truly the sum of its parts, and they all need to be taken into account when reviewing it.

Depreciation Expense

Depreciation is a substantial expense for some companies.

This expense is generally reported as an indirect, operating expense on the income statement. Businesses report the loss in value of their fixed asset, such as vehicles or equipment,  through depreciation.

Employee Pensions and Post-Retirement Benefits

One of the more complex elements of an income statement is the line reporting employee pensions and post-retirement benefits.

The rule on this expense is complex and several key estimates must be made by the business, such as the expected rate of return on the portfolio of funds set aside for these future obligations.

This and other estimates affect the amount of expense recorded.

Warranties and Guarantees

Many products are sold with expressed or implied warranties and guarantees.

The business should estimate the cost of these future obligations and record this amount as an expense in the same period that the goods are sold, along with the cost of goods expense.

It can't really wait until customers actually return products for repair or replacement, but should be forecast as a percent of the total products sold.

Discretionary Expenses

How much is spent on certain expenses depends on the discretion of the management team.

These expenses are usually non-essential, such as entertainment and meals at restaurants.

Final Element of an Income Statement

Earnings before interest and tax (EBIT) displays the profit your business makes before paying income taxes and interest on debt.

Its equivalent to the sales revenue less the cost of goods sold less operating expenses

Income Tax Expense

Income tax expense is the business calculation of the amount it pays in taxes during a certain accounting period.

It generally shows on the last line of the income statement, before the net income calculation.

Interest on Debt

While some lines of an income statement depend on estimates or forecasts, the interest expense line is a basic equation.

Interest expense is one of the main expenses found on the income statement. It is often found at the bottom of the income statement, after operating expenses.

In Conclusion

Business owners can be required to answer questions about the company's financial reports on many occasions. 

It's therefore critical that any officer or manager in a company be thoroughly familiar with the content of the company's financial statements. 

It will after all equip you with critical information to determine the health of your business.