Surety underwriters look at an applicant’s income statement to observe profitability over a period of time, usually one fiscal year. The income statement indicates whether a company made a profit by looking at the expenses to generate revenues.

Unlike the previously discussed balance sheet, an income statement shows changes in company finances over a specific period of time. A balance sheet only shows a snap shot of a business’s finances on a given day. Both reveal important financial and accounting information on business’s financial statement prepared by a Certified Public Accountant (CPA).

On an income statement, revenue refers to the sale of products or services, while expenses refer to the costs incurred to to sell those products and services. A common expense on an income statement is the “cost of goods sold.” The cost of goods sold equals the beginning inventory plus any additional inventory minus the ending inventory.

Underwriters use the income statement to find out if a business makes sufficient profits. Income statements create three different values for measuring profit: gross profit, operating income, and net income.

Gross profit simply equals revenues minus expenses. Sometimes accountants express gross profit as a percentage of total sales, which equals the “gross margin.”

Operating income equals gross profit minus general operating expenses. Operating expenses include costs such as advertising, depreciation, and other miscellaneous costs. To count as an operating expense, the business must actually incur that expense within the business’s ordinary operations.

Net income, also known as “the bottom line,” equals operating income plus investment income, minus interest expenses, minus taxes. Underwriters consider a positive net income value as a net profit and an essential to the business’s existence.

Please note – income statements do not record capital expenditures as expenses. Capital expenditures include purchases such as property, real estate, and equipment. When a business purchases real estate or other capital expenditures, they have purchased another asset. Therefore, the balance sheet shows a reduction in one asset, usually cash, and an increase in another asset, such as real estate. Capital investments and expenditures do not count as operating expenditures and therefore do not show up on the income statement for these reasons.