How to read and apply a year-end income statement

One of the most important financial statements companies create each year is their year-end income statement. This one document provides a quick, at-a-glance summary of how the company performed over the past year, and whether or not it generated a profit. 

While an income statement can be generated at any point in the year, and often is created monthly or quarterly for budgeting, reporting, forecasting and planning purposes, the year-end income statement is the most important version of this document because it recaps a full 12 months of business activity. 

In just a few lines, this important document reveals exactly how effectively the company converted its net revenue into net income. And for publicly traded companies, this document is one of several that are required to be submitted to the Securities and Exchange Commission each year in order to stay listed on the stock exchange. 

Income statements include four main categories of transactions

While the exact structure of income statements varies a bit by industry and local regulations, most include four sections, with multiple types of transactions listed in each section:

• Revenue: This includes the income the company receives through its primary activities, like selling products or services. For example, at a restaurant, the revenue section of its year-end income statement would total up how much money the restaurant received from regular diners, revenue generated from catering and money earned through the sale of special merchandise like branded T-shirts or mugs. 

• Gains (also called other income): The revenue recorded in this section includes money generated through non-primary activities like selling a company vehicle or unused real estate. Depending on the company, this section may be $0 in years when the company did not generate any nontraditional earnings. 

• Expenses: Any money the company spends on normal operations, like electricity in the office, labor costs, research & development investments and inventory costs, is included in the expenses section. 

• Losses: This final category includes any money lost to unusual expenses not related to inventory or operations. For example, if a company loses a lawsuit, that loss will go in this category. Another example is if the company sells a vehicle or real estate at a loss. 

As you can see, the top half of a year-end income statement includes all the good news — the incoming cash and receipts the company needs to be successful. The bottom half of the income statement includes the less-than-good news — the expenses and losses the company hopes to keep at a minimum each year. 

The last line of a year-end income statement refers to that company’s “bottom line”

By adding up a company’s revenue and gains, then deducting its expenses and losses, you get that company’s net income. 

In good years, that income will be positive. That’s often a sign of strong shareholder value, business growth and longevity, though a company doesn’t have to be profitable every single year to be healthy. 

Some companies, particularly growth companies that invest heavily in R&D, may show several years of losses as their investment expenditures exceed their income. But once their innovative product or service hits the market, their income can far outpace expenses. 

Some companies have a fairly simple year-end income statement, called a single-step income statement, where expenses are simply subtracted from revenue to determine that company’s year-end profit. 

But bigger companies with multiple branches, international operations, or mergers and acquisitions may use a more complex year-end income statement called a multiple-step income statement. 

This kind of income statement is much more detailed and divides each of the four key sections into multiple lines, including both pretax and post tax earnings. While this type of income statement is more difficult to generate and review, it does paint a more accurate picture of the company’s financial standing. 

Year-end income statements have multiple uses for company leaders, team members, competitors and investors

The income statements for publicly traded companies are available on the internet, allowing for easy research and analysis of thousands of companies around the world. At this time, private companies are not required to publish their income statements or other financial documents. 

Internally, companies can use their year-end income statement to look for areas of new opportunity. The income statement can reveal unnecessary expenses that should be minimized, income opportunities worth expanding, or major losses to avoid in the future. 

The income statement is also useful to compare your quarterly income statements either back-to-back or year-over-year to track company growth and progress. 

Investors find year-end income statements useful because they allow for easier comparison of two companies in the same industry. While the net income of these companies may vary significantly, studying how efficiently a company converts revenue into profit can reveal lucrative investment opportunities — or ineffective companies worth avoiding. 

Industry rivals can also find income statements a useful piece of a competitive analysis, as they reveal investments, expenses and R&D activities of other companies in their market. 

If a company is curious about how much another company spends on operations, international expansion or real estate for example, the income statement reveals how great an emphasis is placed on each of these expenses. 

Next time you’re curious about the financial standing of a public company, take a look at their year-end statement. You just might find a new opportunity of your own! 

Want more? In addition to accounting and CFO services, Escalon offers an array of back-office operations like HR and payroll so you can focus on running your business. Talk to an expert today

Authors

Grace Townsley

As a professional copywriter in the finance and B2B space, Grace Townsley offers small business leaders big insights—one precisely chosen word at a time. Let's connect!

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