Question

What is the purpose of an income statement, and who is the audience for this document? What components do income statements typically contain? Why?

Answer 1

The income statement is one of the financial statement that shows the profitability of the business during the period. The main purpose of the income statement is that it shows the profit generated by business during the period. The multi step income statement shows the gross profit, operating profit and net income of the business that tell the operating and financial performance of the business.

The investors and customers are the main audience of the income statement, this statement shows the profit generated by the business during the period that tells the opeational success of the business. If firm operation are able to generate enough profit only then company attract new investment. The higher profit tells the ability of the company to cover it's interest obligations.

The component of income statement is as follows:

1. Revenue

2. Cost of goods sold

3. Gross profit

4. Operating expense

5. Operating income

6. Other income and expenses

7. Net profit