A brief introduction of Income Statement

A brief introduction of Income Statement

Income statement is a report that shows the results of the entity’s operations and financial activities for the reporting period. It includes revenues, expenses, gains, and losses. Income statement is also known as “statement of revenue and expenses” or “profit and loss statement”. Fundamental Analyst need to understand and become familiar with the income statement in order to derive financial ratio of the company.

The income statement may be presented by itself on a single page or it may be combined with other comprehensive income information. In the latter case, the report format is called a statement of comprehensive income.

There is no required formatfor how the income statement is to be presented. It is up to the company to present their income statement in a manner that maximizes information relevant to the reader. Typically, Income statement include some or all as below:

  • Revenue/ Sales– income that a company receives from its normal business activities usually from the sales of goods and sercices
  • Cost of Sales – The expenses to produce good and provide services to the customer. Usually just include the cost of raw materials and production
  • Gross Revenue/Sales – The income minus the cost of sales.Usually doesn’t include marketing and Administrative cost
  • Selling, General and Administrative Expenses (SG&A)– This is usually the fixed cost of business which include marketing, administrative cost etc
  • Operating income – The gross revenue minus the fixed cost of businesses
  • Other Income & Expenses – List the costs of a company’s borrowings or profits that are not part of a company’s business operations
  • Tax expense – estimation of tax expenses a company need to pay to goverment
  • Post-tax profit or loss for discontinued operations and for the disposal of these operations– This is special event such as as restructuring charges, unusual or nonrecurring items and discontinued operations etc. These write offs are supposed to be one-time events.
  • Net Profit/Earning  or loss -indicator of a company’s profitability
  • Total comprehensive income – It takes into consideration the effect of foreign currency adjustments,  pension liability adjustments and unrealized gains/losses on certain investments

When presenting information in the income statement, the focus should be on providing information in a manner that maximizes information relevance to the reader. This may mean that the best presentation is one in which the format reveals expenses by their nature, as shown in the following example. This format typically works best for a smaller business.

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