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Income (or Profit and Loss) statement is financial statements that shows company profit or loss over a period of time. The profit or loss is determined by taking all revenues and subtracting all expenses from both operating and non-operating activities. It is of interest to analysts, investors, and potential investors, as it tells them how profitable a company is.
Constituent of Income Statement
Format of the income statement may vary by company. Most companies may include some or all of the following elements in their income statements:
- Other Income
- Other Expense
- Tax Expense
- Depreciation & Amortization Expense
- Operating Income
- Gross Profit
- Net Income
It is the income that a company has from its primary activities, usually from the sale of goods and services to customers. It is also referred to as Sales or Turnover. This value will be the gross of the costs associated with creating the goods sold or in providing services. Revenues include only income from the company’s primary lines of business or operations. It excludes income from other sources like investments.
Income a company earns outside of selling goods and services i.e. secondary activities are called Non – Operating revenues. For example revenue from interest on idle cash.
Expenses are incurred in order to earn normal operating revenues. Under the accrual basis of accounting, expense should appear on the income statement in the same period that the related sales are reported. Cost of Goods Sold (COGS) or Cost of Sales aggregates the direct costs associated with selling products to generate revenue. Direct costs can include labor, parts, materials, and an allocation of other expenses such as depreciation. It does not include any distribution costs or sales force costs.
Expenses from secondary activities are referred to as Non – Operating expenses. Other expenses may include things such as technology, research and development, stock-based compensation, impairment charges, gains/losses on the sale of investments, foreign exchange impacts.
Income Taxes refer to the relevant taxes charged on pre-tax income. The total tax expense can consist of both current taxes and future taxes. It depends on what the tax rate for the company is.
Depreciation & Amortization Expense
They are non-cash expenses that are created by accountants to spread out the cost of capital assets such as Property, Plant, and Equipment (PP&E). Depreciation represents the cost of capital assets on the balance sheet being used over time, and amortization is the similar cost of using intangible assets like goodwill over time.
Operating Income (Operating profit) represents earning from primary business operations. It is the profit before any non-operating income, non-operating expenses, interest, or taxes are subtracted from revenues. It is also referred as EBIT (Earnings Before Interest and Taxes). A company earns an income from investing some of their capital in short to medium term. This is recorded as interest income and is added to the company’s EBIT. Similarly, a company pays interest on moneys borrowed from various sources. This is deducted from EBIT.
EBITDA stands for earnings before interest, taxes, depreciation, and amortization. To get this, add depreciation and amortization expenses to EBIT. It can also be calculated by subtracting SG&A expenses (excluding amortization and depreciation) from gross profit.
Gross Profit (Gross Income) is calculated by subtracting COGS from Sales Revenue or Revenue. Operating expenses, are deducted from the company’s gross profits. Operating expenses (non production) include selling, general, and administrative expenses, referred to as SG&A. This is a non-production cost. It includes all selling expenses related to selling products. Like advertising expenses, rent, salaries, depreciation and amortization expense.
Net income or Earnings after tax or Profit after tax represents the total profits of the company. The income statement usually also reports an earnings per share referred to as EPS. The EPS tells us how much profit the company has made for every share in the company.
Basic EPS is based on the number of shares the company has actually sold. A company makes a number of stock awards like employee stock options. This allow employees to buy the shares at a later date. Diluted EPS is computed as if the impact of such purchases by employees is included in the number of shares outstanding. A smaller difference between Basic EPS and Dilutes EPS signifies that the dilution and ownership stake may not be very large.
Income Statement Example
Below is an example of TCS income statement. It starts with revenue, followed by expense and profit.
Above balance sheet has four columns.
- Column 1 – List financial items
- Column 2 – Notes on accounts reference. It explains the constituents of the financial items in detail.
- Column 3 – Numbers for just concluded year
- Column 4 – Numbers for year prior to just concluded year