The Goal of The Income Statement (part 2)

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Income statements show how much money a company made and spent over a period of time. The aim of this type of statement is usually to show the company’s net earnings or losses by showing the costs and expenses associated with earning that revenue. 

Income statements also report Earnings Per Share (EPS). This calculation tells you how much money shareholders would receive for each share of stock they own if the company decided to distribute all of the net earnings for the period. Companies almost never distribute all of their earnings. Usually they reinvest them in the business. 

To calculate EPS, you take the total net income and divide it by the number of outstanding shares of the company. 

To understand how income statements are set up, think of them as a set of stairs. You start at the top with the total amount of sales brought in from sales of products or services made during the accounting period. This top line is often referred to as gross revenues or sales. It’s called gross because expenses haven’t been deducted from it yet. So the number is gross or unrefined. 

Then you go down, one step at a time. At each step, you make a deduction for certain costs or other operating expenses associated with earning the revenue. At the bottom of the stairs, after deducting all of the expenses, you learn how much the company actually earned or lost during the accounting period. People often call this the bottom line. 

 

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