Income statement: year-end and interim
What is an income statement
An income statement, also known as a profit and loss statement, is a financial document that shows a company's revenues and expenses over a specific period of time, typically a quarter or a year. The difference between revenues and expenses is the company's net income or net loss. The income statement is used by investors and analysts to assess a company's financial performance and health. It is typically one of the financial statements that a company releases to the public.
Year-end income statements vs. interim income statements
Year-end and interim income statements both serve to report a company's financial performance. However, they cover different periods and might be used for slightly different purposes.
Year-end income statement
Duration: As the name implies, a year-end income statement covers a full fiscal year, which is typically a 12-month period.
Purpose: It provides a comprehensive view of the company's financial performance over the entire year. This allows for a holistic assessment of how the company performed, making it a crucial document for annual stockholder meetings, year-end audits, and annual regulatory filings.
Detail and accuracy: Given its annual nature, there is ample time to include detailed information and ensure its accuracy. Adjustments, such as year-end accruals and other accounting adjustments, are typically incorporated, giving a refined and precise view of the company's financial health.
Interim income statement
Duration: Interim income statements cover shorter periods within a fiscal year, often quarterly, though monthly or semi-annually are also possible.
Purpose: Their primary function is to provide timely information to management, investors, and other stakeholders about the company's performance during a part of the year. It assists in making timely decisions, catching financial trends early, and making course corrections if necessary.
Detail and accuracy: Due to the shorter period and the need for timeliness, interim statements may not be as detailed or have the same level of refinement and adjustments as year-end statements. Some expenses, for instance, might be prorated or estimated. While they are accurate, they might be subject to more significant revisions in the next period or the year-end report.
Why would a lender request this document
A lender, such as a bank or other financial institution, may request an income statement from a borrower as part of the loan application process. The lender wants to review the borrower's financial information to assess their ability to repay the loan. Specifically, the lender will be looking at the borrower's income and expenses to determine if they have enough money coming in to cover the loan payments. Additionally, the lender will also look at the borrower's net income, as well as their overall financial stability, to help determine the risk of lending the money. The income statement will help the lender to evaluate the borrower's creditworthiness, which is essential in making the decision of whether to approve or deny the loan.
How to prepare an income statement
Business owners can access their income statements in several ways:
- Accounting software: Many small business owners use accounting software to track their financial transactions and generate financial statements, including income statements. These software allow business owners to access their income statements at any time and also to update it as needed.
- Accountant or bookkeeper: Business owners can also work with an accountant or bookkeeper who will keep track of financial transactions and prepare financial statements, including income statements.
- Manually: Business owners can also create their income statement manually by gathering all the financial information such as revenue, cost of goods sold, operating expenses and creating the statement.
- Business intelligence tools: Some business owners use business intelligence tools to track their financial performance and generate financial statements, including income statements. These tools allow business owners to access their financial information in real-time and create custom reports.