by mrgrind101

Created on: September 29, 2009

There are three documents that every corporation is required by the SEC to present at the end of every quarter; the balance sheet, the income statement, and the statement of cash flows. Each one of these documents gives the public detailed information about how a company is doing compared to its industry. This article will focus on the income statement and what its purposes are.

The income statement is probably the easiest financial statement for the general public to understand. This financial document is basically a road map to the bottom line, also known as the net income of a company. The first equation that should be learned for income statement analysis is:

Revenues - Costs = Gross Income

This is the first formula one needs to focus on while either preparing or evaluating the income statement. The top of the income statement starts with sales revenue, in other words how much money was created from sales during the current period. Now costs of goods sold needs to be calculated. The value of this account is simply the costs of the entire inventory sold during the period. This number needs to subtract from the sales value. The number that remains is the company's gross income. It looks something like:

Sales revenue XXXX

Costs of goods sold (XXXX)

Contribution Margin XXXXX

A company's contribution margin is often looked at as the base of which all other expenses will now be deducted. Now fixed expenses need to be deducted from the contribution margin. Accounts often included in this category are salaries expense, utilities, rent, or any expense that is incurred every quarter.

The next group of expenses to be deducted is called SG&A expenses. These expenses stand for selling, general, and administrative expenses. In these accounts one would find such expenses as any money spent on advertising, travel, meals, etc...After these expenses are deducted we land at a value called income from operations. This value is the total money extracted after a company has paid for its salaries and SG&A's. The next section of expenses is labeled as fringe expenses. This will include any 401k contributions the company has made, insurance premiums, and paid holidays.

The value that we have now worked ourselves down to is called EBIDT. EBIDT stands for earnings before interest depreciation and taxes. Now we can just follow the acronym to deduct the rest of the company's expenses. First net the interest because a company can either have an interest gain or loss.

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