A year-end income statement presents a summary of a company's revenue and expenses for the 12 months prior to the end of a fiscal year. For many businesses, their fiscal year mirrors a calendar year and ends on December 31, but just as many businesses use a custom fiscal year that ends in some month other than December. This income statement is ordinarily part of the company's consolidated financial statements that is prepared once a year by an independent auditor and can be included in a company's annual report to investors.
Businesses use financial statements to evaluate the condition of the company from various perspectives. The four standard statements that are in regular use in the business world are the balance sheet, statement of cash flows, income statement and statement of owners' equity. An income statement is used to determine whether the business is operating at a profit or at a loss. It compares revenues to expenses over a period of time, which is typically a year but can be as short as one month.
Financial statements can be compiled from a company's accounting system at any point, but there are certain times of the year when statements are generated for specific purposes. Most businesses must generate financial statements at year-end, in particular, to enable the company's accountants to prepare tax reports, to close out payroll for the year and to comply with reporting requirements to government agencies and investors. A year-end income statement can refer to either the end of the calendar year or the end of the company's fiscal, or operating, year. The statement will indicate the year-ending date at the top of the report. If the year-ending date is anything other than December 31, the company uses a fiscal year.
Companies use a year-end income statement to present 12 months of revenue and expenses, detail the taxes that have been paid and arrive at a net income or loss figure. This tells management and investors whether the company has been operating at a profit, and whether management has a tight enough reign on expenses as compared to revenue. It also allows analysts to generate financial ratios based on the information that can reveal whether continued or future investment in the company is advisable.
Most importantly, the year-end income statement is generated to zero out the revenue and expense accounts in a company's accounting system. Tax laws set the business cycle at 12 months. At the end of every cycle, the business must total up revenue and expenses and pay income taxes based on the results. The next cycle starts both account types at zero, so there is no confusion about what income has already been taxed.
What Is Reported on the Year-end Income Statement?
The year-end income statement, also known as the profit and loss statement, shows the company’s sales revenues, other financial gains, any financial losses, and expenses for the period of 12 months. This provides a holistic view of the company’s financial health.
You often hear people talking about “the bottom line,” as in “the bottom line is that she couldn’t afford to go to grad school,” or “the bottom line was that Fred had just plain had enough.” The term comes from the last, or bottom, line on a year-end income statement, where the company’s net income is stated. Net income is figured by adding revenues and financial gains, then subtracting expenses and financial losses.
You may have heard it said that a company is operating “in the red” or “in the black.” These phrases also come from the last line of the year-end income statement. If the net income is a negative number, meaning that the company lost more money than it brought in, the number is often shown in red ink. If, on the other hand, the company is profitable, the last line will be in black ink. It’s also common for negative numbers on the year-end statement to be shown in parentheses instead of having a minus sign in front of the number.
The year-end income statement is one of several documents that publicly-traded companies must submit to the Securities and Exchange Commission (SEC) every year. Other forms include:
- The prospectus — which looks at the potentialities of the coming year
- A business summary — which addresses the company’s operations, including products and services, research and development, and competition
- A management discussion and analysis — where the company explains its actions over the previous fiscal year
- Other financial documents — such as the balance sheet and cash flow statement
What Accounts Appear in Year-end Income Statement?
There are many accounts that can appear in year-end statements. Some of these include:
- Operating revenue — This indicates the revenue brought into the company via its primary activities. For example, if the company sells widgets, then selling widgets is its primary activity. If the company services broken widgets, that service is its primary activity.
- Non-operating revenue — This is the money a company earns other than through its primary activities. Some examples of non-operating revenue include:
- Interested earned on business principal in bank accounts
- Royalty payments from strategic partnerships
- Rental income from buildings owned by the company
- Income from an advertisement another business places on the company’s property
- Gains, also known as other income — This is money earned from selling long-held business assets such as vehicles, land, or subsidiary companies.
- Primary activity expenses — These are expenses related to the company’s primary activity, including:
- Cost of goods sold (COGS)
- Selling, general, and administrative expenses (SG&A)
- Research and development (R&D)
- Secondary activity expenses — This line item includes things such as interest paid on outstanding loans the company has taken.
- Losses as expenses — These occur when you sell a long-held business asset at a loss instead of a gain.
What Defines a Fiscal Year for a Business?
A fiscal year for a business is the 12-month period for which the company keeps its records. There are many reasons a company may use a fiscal year instead of a calendar year for account-keeping.
The primary reason to define a fiscal year is to follow a 12-month period beginning on the first day the company was in business. Another reason is to account for more profitable time periods and times of less income equally. Some businesses may follow the school year or an agrarian calendar.