The income statement measures the financial performance of companies and corporations for the previous specified period, and is also known as the net income statement or (Profit and loss). Therefore, the global financial markets monitor the financial results of major companies and their income statements at the end of the fiscal year or quarterly, as the financial results of the companies are one of the most important indicators of the upward and downward movement of stock trading in the financial markets and the effect is immediate once these results are announced. If the results of the companies are positive, they enhance confidence of Investors in those companies and financial markets which raise their market value. However, if the results are negative and disappointing, the confidence of investors will weaken in the shares of those companies. Consequently, its value will fall immediately as a result of less purchase ratio of the shares of those companies.
What is the income statement?
It is a list meant to display the amount of profit or loss for a company or a corporation during a specified period, and it is one of the four important financial statements (Income Statement-Balance Sheet notes-Cash Flow statement – Change of partnership equity).
The income statement shows the following data:
•Net profit and loss.
•Cash dividends per share.
Data is collected during a specific period, which is often yearly or quarterly.
The income statement is usually prepared by the accounting department of the company and audited by an external audit firm to certify its validity or, more precisely, to ensure that it is prepared in accordance with the generally accepted accounting standards and principles.
Accountants generally follow two levels of accounting standards:
1.GAAP Generally Accepted Accounting Principles (USA).
2.IFRS International Financial Reporting standards (International).
The basic 7 accounting principles admitted by all accountants in the world are the followings:
1. The accrual basis.
2. The monetary unit of measurement.
3. The conservatism basis.
4. The principle of continuity.
5. The historical cost principle.
6. The principle of matching revenues and expenses.
7. The principle of full disclosure.
For a deep understanding of the income statement, we can read the results of Amazon for the 3rd quarter of 2021.
By the end of the third quarter, Amazon listed company on the US stock exchange under the NASDAQ index, showed the following figures (numbers in millions of U.S dollar):
After analysing Amazon results, we could observe the following:
1. Total revenue dropped in the 3rd quarter compared to the 2nd quarter.
2. The company maintained the same gross profit ratio at 43.2%
3. Operations costs increased in the third quarter compared to the second quarter.