{"id":29772,"date":"2024-07-24T11:07:54","date_gmt":"2024-07-24T16:07:54","guid":{"rendered":"https:\/\/breakingintowallstreet.com\/?post_type=biws_kb&#038;p=29772"},"modified":"2024-11-19T22:47:07","modified_gmt":"2024-11-20T03:47:07","slug":"income-statement","status":"publish","type":"biws_kb","link":"https:\/\/breakingintowallstreet.com\/kb\/accounting\/income-statement\/","title":{"rendered":"The Income Statement: Definition, Examples, and Interpretation"},"content":{"rendered":"<div id=\"ez-toc-container\" class=\"ez-toc-v2_0_81 counter-flat ez-toc-counter ez-toc-grey ez-toc-container-direction\">\n<div class=\"ez-toc-title-container\">\n<p class=\"ez-toc-title\" style=\"cursor:inherit\">The Income Statement: Definition, Examples, and Interpretation<\/p>\n<span class=\"ez-toc-title-toggle\"><\/span><\/div>\n<nav><ul class='ez-toc-list ez-toc-list-level-1 ' ><li class='ez-toc-page-1'><a class=\"ez-toc-link ez-toc-heading-1\" href=\"https:\/\/breakingintowallstreet.com\/kb\/accounting\/income-statement\/#What_is_the_Income_Statement_What_Are_Its_Different_Sections\">What is the Income Statement? What Are Its Different Sections?<\/a><\/li><li class='ez-toc-page-1'><a class=\"ez-toc-link ez-toc-heading-2\" href=\"https:\/\/breakingintowallstreet.com\/kb\/accounting\/income-statement\/#Real-Life_Income_Statement_Example_and_Template\">Real-Life Income Statement Example and Template<\/a><\/li><li class='ez-toc-page-1'><a class=\"ez-toc-link ez-toc-heading-3\" href=\"https:\/\/breakingintowallstreet.com\/kb\/accounting\/income-statement\/#More_Advanced_Income_Statement_Nuances_and_Line_Items\">More Advanced Income Statement Nuances and Line Items<\/a><\/li><li class='ez-toc-page-1'><a class=\"ez-toc-link ez-toc-heading-4\" href=\"https:\/\/breakingintowallstreet.com\/kb\/accounting\/income-statement\/#Why_Does_Item_X_Appear_or_Not_Appear_on_the_Income_Statement\">Why Does Item X Appear or Not Appear on the Income Statement?<\/a><\/li><li class='ez-toc-page-1'><a class=\"ez-toc-link ez-toc-heading-5\" href=\"https:\/\/breakingintowallstreet.com\/kb\/accounting\/income-statement\/#Income_Statement_Forecasting_in_Financial_Models\">Income Statement Forecasting in Financial Models<\/a><\/li><li class='ez-toc-page-1'><a class=\"ez-toc-link ez-toc-heading-6\" href=\"https:\/\/breakingintowallstreet.com\/kb\/accounting\/income-statement\/#What_You_Need_to_Know_About_the_Income_Statement_in_Interviews\">What You Need to Know About the Income Statement in Interviews<\/a><\/li><\/ul><\/nav><\/div>\n\n<blockquote><p><strong>Income Statement Definition:<\/strong> In accounting, the Income Statement shows a company\u2019s revenue, expenses, and taxes over a <strong>PERIOD<\/strong>, such as 1 year, 1 quarter, or 1 month; items must correspond to a delivery or allocation in the period and affect the business income available to the common shareholders of the business (i.e., the owners).<\/p><\/blockquote>\n<p>The <strong>Income Statement<\/strong> is critical in almost any financial analysis, including <a href=\"https:\/\/mergersandinquisitions.com\/3-statement-model\/\" target=\"_blank\" rel=\"noopener\">3-statement projection models<\/a>, <a href=\"https:\/\/breakingintowallstreet.com\/kb\/debt-equity\/debt-vs-equity-analysis\/\" target=\"_blank\" rel=\"noopener\">debt vs. equity analysis<\/a>, <a href=\"https:\/\/mergersandinquisitions.com\/lbo-modeling-test\/\" target=\"_blank\" rel=\"noopener\">leveraged buyout models<\/a>, <a href=\"https:\/\/breakingintowallstreet.com\/kb\/ma-and-merger-models\/merger-model-walkthrough\/\" target=\"_blank\" rel=\"noopener\">merger models<\/a>, and more.<\/p>\n<p>It even comes up in industry-specific modeling in fields like <a href=\"https:\/\/breakingintowallstreet.com\/kb\/project-finance\/\" target=\"_blank\" rel=\"noopener\">infrastructure<\/a> and <a href=\"https:\/\/breakingintowallstreet.com\/kb\/real-estate-modeling\/\" target=\"_blank\" rel=\"noopener\">real estate<\/a> because assets like offices, warehouses, solar plants, and wind farms also have Income Statements.<\/p>\n<p>You can find plenty of online sources that present boring definitions, so we\u2019ll focus here on the <strong>real-life implications and uses<\/strong> of the Income Statement, including how it works in financial models and what you need to know about it in interviews.<\/p>\n<p>Here are the files and resources for this tutorial:<\/p>\n<h3><strong>Files &amp; Resources:<\/strong><\/h3>\n<ul>\n<li><a href=\"https:\/\/youtube-breakingintowallstreet-com.s3.us-east-1.amazonaws.com\/Accounting\/Income-Statement\/105-34-Income-Statement-Slides.pdf\" target=\"_blank\" rel=\"noopener\">Income Statement &#8211; Summary and Presentation Slides (PDF)<\/a><\/li>\n<li><a href=\"https:\/\/youtube-breakingintowallstreet-com.s3.us-east-1.amazonaws.com\/Accounting\/Income-Statement\/105-34-Simple-Income-Statement.xlsx\" target=\"_blank\" rel=\"noopener\">Simple Income Statement for an Online Business (XL)<\/a><\/li>\n<li><a href=\"https:\/\/youtube-breakingintowallstreet-com.s3.us-east-1.amazonaws.com\/Accounting\/Income-Statement\/105-34-Monster-Financial-Statements.pdf\" target=\"_blank\" rel=\"noopener\">Monster Beverage \u2013 Financial Statements (PDF)<\/a><\/li>\n<li><a href=\"https:\/\/youtube-breakingintowallstreet-com.s3.us-east-1.amazonaws.com\/Accounting\/Income-Statement\/105-34-Income-Statement-Example.xlsx\" target=\"_blank\" rel=\"noopener\">Monster Beverage \u2013 Excel Version of the Balance Sheet in a Financial Model (XL)<\/a><\/li>\n<\/ul>\n<h3><strong>Video Table of Contents:<\/strong><\/h3>\n<ul>\n<li><strong>0:00:<\/strong> Introduction<\/li>\n<li><strong>0:39:<\/strong> The Short Version<\/li>\n<li><strong>5:43:<\/strong> Part 1: More Advanced Line Items<\/li>\n<li><strong>7:24:<\/strong> Part 2: Why Does Item X Appear on the IS?<\/li>\n<li><strong>9:50:<\/strong> Part 3: Income Statement Forecasting<\/li>\n<li><strong>11:46:<\/strong> Part 4: The Income Statement in Interviews<\/li>\n<li><strong>14:10:<\/strong> Recap and Summary<\/li>\n<\/ul>\n<h2><span class=\"ez-toc-section\" id=\"What_is_the_Income_Statement_What_Are_Its_Different_Sections\"><\/span><strong>What is the Income Statement? What Are Its Different Sections?<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p>As stated above, the Income Statement shows a company\u2019s revenue, expenses, and taxes over a <strong>PERIOD<\/strong>, such as 1 year, 1 quarter, or 1 month.<\/p>\n<p>If we look at a very simple company, such as one that provides online courses and coaching services, the Income Statement might look like this:<\/p>\n<p><img decoding=\"async\" class=\"aligncenter wp-image-29773 size-full\" title=\"Simple Income Statement\" src=\"https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/07\/24110524\/01-Simple-Income-Statement.jpg\" alt=\"Simple Income Statement\" width=\"1032\" height=\"1416\" srcset=\"https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/07\/24110524\/01-Simple-Income-Statement.jpg 1032w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/07\/24110524\/01-Simple-Income-Statement-219x300.jpg 219w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/07\/24110524\/01-Simple-Income-Statement-746x1024.jpg 746w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/07\/24110524\/01-Simple-Income-Statement-768x1054.jpg 768w\" sizes=\"(max-width: 1032px) 100vw, 1032px\" \/><\/p>\n<p>The main sections in a standard Income Statement include:<\/p>\n<ul>\n<li><strong>Revenue:<\/strong> This represents <em>net sales<\/em> across all the company\u2019s segments. So, if a company sells and delivers 100,000 widgets for $10.00 each in the period, its revenue is $1 million. This is based on <strong>delivery<\/strong>, not cash collection, at least for large\/public companies.<\/li>\n<li><strong><a href=\"https:\/\/breakingintowallstreet.com\/kb\/accounting\/cogs\/\" target=\"_blank\" rel=\"noopener\">Cost of Goods Sold (COGS) or Cost of Sales<\/a>:<\/strong> These represent the \u201cper unit\u201d costs of selling and delivering the products and services, so they are <strong>100% variable<\/strong>. These might represent raw material and shipping costs for physical products; for services and digital products, they might consist of the labor costs to deliver and support the product\/service, such as the coaches who get paid to do the coaching.<\/li>\n<li><strong>Operating Expenses:<\/strong> These are the costs of anything that <strong>cannot<\/strong> be linked to individual units sold, such as paying for employees, rent, advertising, utilities, insurance, accounting\/audit, and other services. Many of these expenses are <strong>fixed<\/strong>, but some also have a variable component. For example, <strong>rent<\/strong> increases as the company\u2019s revenue increases because it needs more space as it hires more employees \u2013 but it may not step up <em>directly<\/em> in line with revenue.<\/li>\n<li><strong>Other Income and Expenses:<\/strong> Anything \u201cmiscellaneous\u201d goes here, and so do items like interest expense paid on Debt and interest income earned on cash or investments. This area reflects the company\u2019s \u201cside activities\u201d and its financing costs.<\/li>\n<li><strong>Taxes:<\/strong> This is what the company owes to the government based on its revenue and expenses in the period.<\/li>\n<\/ul>\n<p>Besides these specific sections, there are also <strong>summary lines<\/strong> worth noting:<\/p>\n<ul>\n<li><strong>Gross Profit:<\/strong> Equal to Revenue minus COGS, this tells you how much <em>additional potential profit<\/em> the company could make from each unit sale, before fixed expenses<\/li>\n<li><strong><a href=\"https:\/\/breakingintowallstreet.com\/kb\/accounting\/ebit-operating-income\/\" target=\"_blank\" rel=\"noopener\">Operating Income<\/a>:<\/strong> This tells you how much the company earned from its <em>core business<\/em>, before taxes, side activities, and financing costs. It\u2019s one of the key inputs in the <a href=\"https:\/\/breakingintowallstreet.com\/kb\/accounting\/ebitda\/\" target=\"_blank\" rel=\"noopener\">EBITDA calculation<\/a> as well.<\/li>\n<li><strong><a href=\"https:\/\/breakingintowallstreet.com\/kb\/accounting\/net-income\/\" target=\"_blank\" rel=\"noopener\">Net Income<\/a>:<\/strong> How much profit did the business generate after expenses and taxes? This is the literal \u201cbottom line\u201d on the Income Statement, but there are some variations, such as Net Income to Common.<\/li>\n<\/ul>\n<p>You can also make these numbers into <strong>margins<\/strong> by dividing them by Revenue.<\/p>\n<p>For example, the <a href=\"https:\/\/breakingintowallstreet.com\/kb\/accounting\/gross-margin\/\" target=\"_blank\" rel=\"noopener\">Gross Margin<\/a> equals the Gross Profit \/ Revenue and indicates the company\u2019s profit percentage on each sale (before fixed expenses, taxes, etc.).<\/p>\n<h2><span class=\"ez-toc-section\" id=\"Real-Life_Income_Statement_Example_and_Template\"><\/span><strong>Real-Life Income Statement Example and Template<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p>Monster Beverage has a good, simple example of an Income Statement.<\/p>\n<ul>\n<li><a href=\"https:\/\/youtube-breakingintowallstreet-com.s3.us-east-1.amazonaws.com\/Accounting\/Income-Statement\/105-34-Monster-Financial-Statements.pdf\" target=\"_blank\" rel=\"noopener\">Monster Beverage \u2013 Financial Statements (PDF)<\/a><\/li>\n<li><a href=\"https:\/\/youtube-breakingintowallstreet-com.s3.us-east-1.amazonaws.com\/Accounting\/Income-Statement\/105-34-Income-Statement-Example.xlsx\" target=\"_blank\" rel=\"noopener\">Monster Beverage \u2013 Excel Version of the Income Statement in a Financial Model (XL)<\/a><\/li>\n<\/ul>\n<p>Here\u2019s an image of the company\u2019s version:<\/p>\n<p><img decoding=\"async\" class=\"aligncenter wp-image-29774 size-full\" title=\"Monster - Income Statement\" src=\"https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/07\/24110557\/02-Monster-Income-Statement.jpg\" alt=\"Monster - Income Statement\" width=\"2019\" height=\"1462\" srcset=\"https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/07\/24110557\/02-Monster-Income-Statement.jpg 2019w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/07\/24110557\/02-Monster-Income-Statement-300x217.jpg 300w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/07\/24110557\/02-Monster-Income-Statement-1024x741.jpg 1024w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/07\/24110557\/02-Monster-Income-Statement-768x556.jpg 768w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/07\/24110557\/02-Monster-Income-Statement-1536x1112.jpg 1536w\" sizes=\"(max-width: 2019px) 100vw, 2019px\" \/><\/p>\n<p>And here\u2019s our version with several changes:<\/p>\n<p><img decoding=\"async\" class=\"aligncenter wp-image-29775 size-full\" title=\"Modified Income Statement\" src=\"https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/07\/24110618\/03-Modified-Income-Statement.jpg\" alt=\"Modified Income Statement\" width=\"1287\" height=\"865\" srcset=\"https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/07\/24110618\/03-Modified-Income-Statement.jpg 1287w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/07\/24110618\/03-Modified-Income-Statement-300x202.jpg 300w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/07\/24110618\/03-Modified-Income-Statement-1024x688.jpg 1024w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/07\/24110618\/03-Modified-Income-Statement-768x516.jpg 768w\" sizes=\"(max-width: 1287px) 100vw, 1287px\" \/><\/p>\n<p>We tend to make a few changes to company-provided Income Statements:<\/p>\n<ol>\n<li><strong>Level of Detail<\/strong> \u2013 In some cases, such as with the Revenue here, we show the components in more detail. But in other cases, we simplify and consolidate, such as if the company records many small\/insignificant line items that do not drive the business.<\/li>\n<li><strong>Signs<\/strong> \u2013 We prefer to record expenses and taxes with <strong>negative signs<\/strong> and income sources with <strong>positive signs<\/strong>. This makes linking and checking the model easier because you do not have to think about whether to add or subtract an item. Everything is simply \u201cadded,\u201d and each line has the correct positive or negative sign.<\/li>\n<\/ol>\n<div class='code-block code-block-2' style='margin: 8px 0; clear: both;'>\n<div class=\"kb-adinsert-modal\">\n    <div class=\"kb-adinsert-top\">\n      <div class=\"media\">\n          <img decoding=\"async\" class=\"alignnone size-full wp-image-28448\" src=\"https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/04\/24164120\/adv-fm-tile.png\" alt=\"PowerPoint Pro\" width=\"128\" height=\"128\" \/>\n      <\/div>\n      <div class=\"content\">\n          <h3>Master Financial Modeling for Investment Banking With <strong>BIWS Core Financial Modeling<\/strong><\/h3>\n      <\/div>\n    <\/div>\n    \n    <div class=\"full_text\">\n    \t<ul>\n        \t<li>\n            \t<h4>Become a financial modeling pro<\/h4>\n              <p>158 videos, detailed written guides, Excel files, quizzes, and more<\/p>\n\t\t\t    <\/li>\n          <li>\n          \t<h4>Complete 10+ detailed global case studies<\/h4>\n            <p>These include both the theory and the practical applications<\/p>\n\t\t\t    <\/li>\n          <li>\n          \t<h4>Prepare for your internship or full-time job<\/h4>\n            <p>Gain the skills you need to \u201chit the ground running\u201d on Day 1\n\n<\/p>\n\t\t\t  <\/li>\n      <\/ul>\n        \n      <a class=\"cta-link orange-button-medium\" href=\"https:\/\/breakingintowallstreet.com\/core-financial-modeling\/\" target=\"_blank\">Full Details<\/a>\n      \n      <a class=\"cta-link orange-button-medium bg-blue\" href=\"https:\/\/biws-support.s3.us-east-1.amazonaws.com\/Course-Outlines\/Core-Financial-Modeling-Course-Outline.pdf\" target=\"_blank\" rel=\"noopener\">Short Outline<\/a>\n    <\/div>\n<\/div><\/div>\n\n<h2><span class=\"ez-toc-section\" id=\"More_Advanced_Income_Statement_Nuances_and_Line_Items\"><\/span><strong>More Advanced Income Statement Nuances and Line Items<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p>In real life, you will see more complex line items on the Income Statement.<\/p>\n<p>For example:<\/p>\n<ul>\n<li><strong><a href=\"https:\/\/breakingintowallstreet.com\/kb\/accounting\/why-gains-and-losses-are-non-cash-charges\/\" target=\"_blank\" rel=\"noopener\">Gains and Losses<\/a><\/strong> if a company sells an asset in the period.<\/li>\n<li><strong>Depreciation &amp; Amortization<\/strong> on a company\u2019s long-term operational assets.<\/li>\n<li><strong>Impairments and Write-Downs<\/strong> if a company believes the values of some of its assets have declined.<\/li>\n<li><strong>Preferred Dividends<\/strong>, which are like the \u201cinterest expense\u201d but on Preferred Stock rather than Debt \u2013 and are not tax-deductible (unlike interest).<\/li>\n<li><strong>Net Income from Associates or Equity Investments and Net Income Attributable to Noncontrolling Interests:<\/strong> These relate to much more complicated topics; please see our tutorials on the <a href=\"https:\/\/mergersandinquisitions.com\/equity-method-of-accounting\/\" target=\"_blank\" rel=\"noopener\">equity method of accounting<\/a> and <a href=\"https:\/\/mergersandinquisitions.com\/noncontrolling-interests\/\" target=\"_blank\" rel=\"noopener\">consolidation accounting<\/a>. But in short, they relate to the income from a company\u2019s <em>partial ownership<\/em> in other companies.<\/li>\n<\/ul>\n<p>Of this list, <strong>Depreciation &amp; Amortization<\/strong> is easily the most important topic for interviews, case studies, and the job itself.<\/p>\n<p>It represents the <strong>allocation<\/strong> of a company&#8217;s previous capital spending (Capital Expenditures or Intangible Purchases) over many years.<\/p>\n<p>When a company buys a factory, it might be useful for 10, 15, or 20+ years, so it can\u2019t record the entire expense upfront on its Income Statement.<\/p>\n<p>Instead, it records the cash spent for the factory on its <a href=\"https:\/\/breakingintowallstreet.com\/kb\/accounting\/cash-flow-statement\/\" target=\"_blank\" rel=\"noopener\">Cash Flow Statement<\/a> and then <strong>allocates<\/strong> the spending over its useful life in the Depreciation line on the Income Statement.<\/p>\n<p><strong>The tricky thing is that in real life, Depreciation &amp; Amortization could appear as a separate line item, embedded within other line items, or a mix of both.<\/strong><\/p>\n<p>You must look at the <strong>Cash Flow Statement<\/strong> to get the true number.<\/p>\n<p>Once you have it, you could modify the Income Statement to reflect the total D&amp;A in a separate line, but it\u2019s not necessary if you understand that expenses may be embedded within other line items:<\/p>\n<p><img decoding=\"async\" class=\"aligncenter wp-image-29776 size-full\" title=\"Depreciation on the Income Statement\" src=\"https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/07\/24110647\/04-Income-Statement-Depreciation.jpg\" alt=\"Depreciation on the Income Statement\" width=\"1512\" height=\"1254\" srcset=\"https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/07\/24110647\/04-Income-Statement-Depreciation.jpg 1512w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/07\/24110647\/04-Income-Statement-Depreciation-300x249.jpg 300w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/07\/24110647\/04-Income-Statement-Depreciation-1024x849.jpg 1024w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/07\/24110647\/04-Income-Statement-Depreciation-768x637.jpg 768w\" sizes=\"(max-width: 1512px) 100vw, 1512px\" \/><\/p>\n<p>With the other items, Gains and Losses and Impairments and Write-Downs all correspond to <strong>events in the current period<\/strong> and affect the income available to the owners, so they all appear on the Income Statement.<\/p>\n<p>Preferred Dividends require a bit more explanation (see below).<\/p>\n<h2><span class=\"ez-toc-section\" id=\"Why_Does_Item_X_Appear_or_Not_Appear_on_the_Income_Statement\"><\/span><strong>Why Does Item X Appear or Not Appear on the Income Statement?<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p>We receive many questions about why Item X appears on the Income Statement while Related Item Y does not. For example:<\/p>\n<ul>\n<li>Why do Preferred Dividends appear on the Income Statement while Common Dividends do not? (They\u2019re on the Cash Flow Statement)<\/li>\n<li>Why does the Interest Expense appear on the Income Statement, but Debt Issuances and Debt Principal Repayments do not? (They\u2019re on the Cash Flow Statement)<\/li>\n<\/ul>\n<p>The <strong>short answer <\/strong>is that you should think about the requirements to appear on the Income Statement:<\/p>\n<ol>\n<li>Items must correspond to a delivery or allocation in the period.<\/li>\n<li>Items must affect the income available to the common shareholders of the business (i.e., the owners).<\/li>\n<\/ol>\n<p>With the first question, Preferred Dividends <strong>directly reduce the income available to the owners<\/strong>, which is why they are deducted in the Net Income to Common calculation.<\/p>\n<p>The Preferred Stockholders <strong>always get paid first<\/strong>, before the equity owners, and these Preferred Dividends directly reduce how much could be distributed to the owners in the period.<\/p>\n<p>Common Dividends also represent a payment made in the current period, but they do not affect the income available to the owners \u2013 because they <em>are<\/em> the distribution to the owners.<\/p>\n<p>With the second question, Debt Issuances and Debt Principal Repayments correspond to <strong>longer-term items<\/strong> because Debt typically remains outstanding for many years.<\/p>\n<p>If a company issues Debt or repays some of it, that doesn\u2019t just affect the current period \u2013 it changes the company\u2019s obligations and Interest Expense going forward.<\/p>\n<p>By contrast, the Interest Expense itself applies <em>only<\/em> to the current period and doesn\u2019t affect the future (with some exceptions, such as <a href=\"https:\/\/breakingintowallstreet.com\/kb\/leveraged-buyouts-and-lbo-models\/pik-interest\/\" target=\"_blank\" rel=\"noopener\">PIK Interest<\/a>).<\/p>\n<p>Also, these Debt issuances and repayments do not directly affect the income available to the owners <em>in the current period<\/em>.<\/p>\n<p>Therefore, Debt issuances and principal repayments are always shown on the Cash Flow Statement.<\/p>\n<h2><span class=\"ez-toc-section\" id=\"Income_Statement_Forecasting_in_Financial_Models\"><\/span><strong>Income Statement Forecasting in Financial Models<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p>In <a href=\"https:\/\/mergersandinquisitions.com\/financial-modeling\/\" target=\"_blank\" rel=\"noopener\">financial models<\/a>, there are two main options for forecasting items like Revenue, COGS, and Operating Expenses on the Income Statement:<\/p>\n<ol>\n<li><strong>Option #1: Simple Percentages<\/strong> \u2013 For example, you could make Revenue grow at 5% or 10% per year, say that COGS represent 50% of Revenue and that Operating Expenses represent 20% of Revenue. This method \u201cworks\u201d for quick\/simple models but is not necessarily ideal for making real-life decisions.<\/li>\n<li><strong>Option #2: Unit Economics<\/strong> \u2013 For example, the company sells 100,000 widgets per year at $10 per widget, and it costs $3 per widget to produce and deliver each one. The company also needs 5 employees to support this business, and each one costs $100,000 per year.<\/li>\n<\/ol>\n<p>You could also <strong>mix and match<\/strong> the methods, using unit economics for some line items, such as Revenue, but simple percentages for others, such as expenses.<\/p>\n<p>We tend to take a \u201cmiddle of the road\u201d approach, using the following guidelines:<\/p>\n<ol>\n<li><strong>30-to-60-Minute Models<\/strong> \u2013 We might use simple unit economics for Revenue but will often use percentage estimates for everything else.<\/li>\n<li><strong>2<\/strong>&#8211;<strong>to-3-Hour+ Models<\/strong> \u2013 We attempt to use \u201cunit economics\u201d wherever possible, depending on the information available.<\/li>\n<\/ol>\n<p>In general, it\u2019s easier to create unit-level forecasts for <strong>Revenue<\/strong> than for expenses because many companies do not break out employees or spending by category.<\/p>\n<p>Here\u2019s an example from the Monster Beverage Model:<\/p>\n<p><img decoding=\"async\" class=\"aligncenter wp-image-29777 size-full\" title=\"Income Statement Forecasting\" src=\"https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/07\/24110720\/05-Income-Statement-Forecasting.jpg\" alt=\"Income Statement Forecasting\" width=\"2069\" height=\"1052\" srcset=\"https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/07\/24110720\/05-Income-Statement-Forecasting.jpg 2069w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/07\/24110720\/05-Income-Statement-Forecasting-300x153.jpg 300w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/07\/24110720\/05-Income-Statement-Forecasting-1024x521.jpg 1024w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/07\/24110720\/05-Income-Statement-Forecasting-768x390.jpg 768w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/07\/24110720\/05-Income-Statement-Forecasting-1536x781.jpg 1536w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/07\/24110720\/05-Income-Statement-Forecasting-2048x1041.jpg 2048w\" sizes=\"(max-width: 2069px) 100vw, 2069px\" \/><\/p>\n<h2><span class=\"ez-toc-section\" id=\"What_You_Need_to_Know_About_the_Income_Statement_in_Interviews\"><\/span><strong>What You Need to Know About the Income Statement in Interviews<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p>In <a href=\"https:\/\/mergersandinquisitions.com\/investment-banking-interview-questions-and-answers\/\" target=\"_blank\" rel=\"noopener\">investment banking interviews<\/a>, you should know the basic definitions of the financial statements, the most common line items that appear on the Income Statement, and how simple changes, such as an addition product sale, affect it.<\/p>\n<p><strong>The Income Statement is especially important in accounting questions because you should always START with it and then move to the other statements.<\/strong><\/p>\n<p>That\u2019s because you need the Net Income at the bottom of the Income Statement to \u201cfeed into\u201d the Cash Flow Statement; the Ending Cash on the CFS then flows into the <a href=\"https:\/\/breakingintowallstreet.com\/kb\/accounting\/balance-sheet\/\" target=\"_blank\" rel=\"noopener\">Balance Sheet<\/a>.<\/p>\n<p>Even if you get a question about a <em>non-Income Statement line item<\/em>, you should still <em>start there<\/em> and state explicitly that nothing changes.<\/p>\n<p><strong>AVOID<\/strong> mentioning whether the change affects Gross Profit, Operating Income, or other \u201cin-between\u201d line items on the Income Statement.<\/p>\n<p>Focus on how it affects <strong>Pre-Tax Income and Net Income<\/strong> because you need the Net Income to explain the other statements.<\/p>\n<p>As an example, consider this question:<\/p>\n<p><em>\u201cWhat happens when a company\u2019s Accounts Receivable balance increases by $100? Assume no corresponding expenses.\u201d<\/em><\/p>\n<p>You would always <strong>start with the Income Statement<\/strong> and then move to the others:<\/p>\n<ul>\n<li><strong>Income Statement:<\/strong> This means the company has delivered a product worth $100 but not collected the cash yet, so Revenue is up by $100, Pre-Tax Income is up by $100 (since there are no expenses), and Net Income is up by $75 at a 25% tax rate.<\/li>\n<li><strong>Cash Flow Statement:<\/strong> Net Income is up by $75, but the company hasn\u2019t received the cash yet, so the Change in AR is negative $100, and Cash at the bottom is down by $25.<\/li>\n<li><strong><a href=\"https:\/\/breakingintowallstreet.com\/kb\/accounting\/balance-sheet\/\" target=\"_blank\" rel=\"noopener\">Balance Sheet<\/a>:<\/strong> Cash on the Assets side is down by $25, and AR is up by $100, so Total Assets are up by $75. Equity on the L&amp;E side is up by $75 due to the increased Net Income, so both sides are up by $75 and balance.<\/li>\n<\/ul>\n<p>If you had not started with the Income Statement, you would not have been able to walk through the other changes since you would not have had the Net Income figure.<\/p>\n<p><strong>This is especially important here because you might be tempted to start with the Balance Sheet since AR is a Balance Sheet line item \u2013 but that is not correct!<\/strong><\/p>\n<p>You need the Income Statement <em>first<\/em> because this change represents a specific scenario that affects Revenue and Net Income on the Income Statement.<\/p>\n","protected":false},"excerpt":{"rendered":"<p>In accounting, the Income Statement shows a company\u2019s revenue, expenses, and taxes over a PERIOD, such as 1 year, 1 quarter, or 1 month; items must correspond to a delivery or allocation in the period and affect the business income available to the common shareholders of the business (i.e., the owners).<\/p>\n","protected":false},"featured_media":0,"template":"","class_list":["post-29772","biws_kb","type-biws_kb","status-publish","hentry","kb_category-accounting"],"acf":[],"_links":{"self":[{"href":"https:\/\/breakingintowallstreet.com\/wp-json\/wp\/v2\/biws_kb\/29772","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/breakingintowallstreet.com\/wp-json\/wp\/v2\/biws_kb"}],"about":[{"href":"https:\/\/breakingintowallstreet.com\/wp-json\/wp\/v2\/types\/biws_kb"}],"wp:attachment":[{"href":"https:\/\/breakingintowallstreet.com\/wp-json\/wp\/v2\/media?parent=29772"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}