Let’s Understand What is Income Statement
The income statement of a company provides information on the financial results of the business activities carried out by the company over a specified amount of time. The income statement provides information regarding the amount of revenue that was generated by the company during a specific time period as well as the costs that were incurred in connection with the generation of that revenue. If we ignore gains and losses for a moment, the fundamental equation that underlies the income statement is as follows: Revenue minus Expenses equals Net income. There are a few different names that can be used to refer to the income statement, including the "statement of operations," "statement of earnings," and "profit and loss (P&L) statement."
What are the Components of an Income Statement?
Since expenses and income depend on the nature of operations or business conducted, the income statement may differ slightly between different companies. There are a few generic line items, though, that can be found on any income statement.
The following are some of the most common items that appear on income statements:
At the very top of the income statement is a column labelled "Revenue." This column displays the total amount of money the company made from its product or service sales. This value will be the gross of all the costs associated with the production of the goods that are being sold or the provision of the services. There are some businesses that have multiple revenue streams that all contribute to the overall revenue line.
Cost of Goods Sold (COGS)
This refers to the direct costs incurred in producing or acquiring the goods sold by a company. It includes the cost of materials, direct labor, and manufacturing overhead. COGS is subtracted from revenue to calculate gross profit.
Gross profit is the difference between revenue and the cost of goods sold. It indicates how effectively a company can produce its goods or deliver its services. Gross profit is used to cover operating expenses and generate net profit.
Expenses that are classified as operating expenses are those that are incurred by a firm as a direct result of doing its regular business activities. These are the expenses that are incurred in a manner that is not directly linked to the production of the company's income or the maintenance of its operations. The term "operating expenses" can be further subdivided into a number of additional significant categories, the most prevalent of which are as follows:
Selling, General and Administrative expenses (SG&A)
It include all of the costs associated with payroll combined. In contrast to production costs such as direct labour, SGA is typically understood to constitute a sizeable portion of costs that are not directly related to production.
Selling expenses: It refers to the costs that must be incurred in order to sell products (e.g., salaries of sales people, commissions and travel expenses, advertising, freight, shipping, depreciation of sales store buildings and equipment, etc.).
General and Administrative (G&A) expenses: It represents the costs incurred in running the business, such as salaries for officers and executives, professional and legal fees, the cost of utilities and insurance, the depreciation of office buildings and equipment, office rents, office supplies, and so on.
Research & Development (R&D) expenses
It represents the costs that are incurred during the research and development process.
This category includes income or expenses that are not directly related to the core operations of the business. It may include items such as investment income, gains or losses from the sale of investments or subsidiaries, and income from discontinued operations.
Operating Income Or EBIT
The operating income of a business is a metric that indicates what proportion of its total revenue will ultimately be converted into profits. The operating income of a company is comparable to its earnings before interest and taxes are deducted (EBIT)
Formula: Operating Income=Gross Profit−Operating Expenses
Expenses related to running a business include things like depreciation, amortisation, and other operating costs in addition to selling, general, and administrative costs (SG&A). Items such as investments in other businesses (which generate non-operating income), taxes, and interest expenses are not included in operating income. In addition, one should not include one-time events or expenses, such as money received for the resolution of a legal dispute. Earnings from operations are needed to determine a company's operating margin, which is a measure of how efficiently a business runs its operations.
On the income statement, the expenditure for interest is categorised as a non-operating expense. It is a representation of the interest that must be paid on any borrowings, whether they be bonds, loans, convertible debt, or lines of credit. In its most basic form, it is computed by multiplying the interest rate by the amount of principal that is still outstanding on the debt.
The revenue that is obtained as a result of lending money to various other entities is referred to as interest income. The term is typically located in the income statement of the company and is used to report the interest earned on the cash that is held in the savings account, certificates of deposit, or other investments.
Non -Recurring And Extraordinary Items
Items or events that are non-recurring and extraordinary are expenses or revenues that are either one-time occurrences or do not correspond to day-to-day core operations. Non-recurring things or events can also be described as extraordinary items or events. Examples of one-time events include profits or losses realised through the sale of assets or from the winding down of a firm. An income statement prepared in accordance with generally accepted accounting principles (GAAP) may contain a number of items that relate to non-recurring or extraordinary events. It is the responsibility of a skilled analyst to locate these items and then to relocate them to the bottom of the income statement. This will allow the income statement to contain line items for EBITDA, EBIT, and net income that accurately reflect day-to-day, ongoing operations. We refer to this particular EBITDA, EBIT, and net income as "clean."
(EBT (Pre-Tax Income)
Earnings Before Tax, also known as pre-tax income, is the amount that is calculated by deducting interest expense from operating income. EBT is an abbreviation for "Earnings Before Tax." Before calculating the net income, this is the last subtotal to be taken into account.
Income Taxes are the applicable taxes that are levied on a person's pre-tax income. It's possible that current taxes and future taxes will be included in the overall tax expense.
Net Income (PAT)
When calculating one's net income, one must first subtract the amount of income taxes paid from the amount of pre-tax income. After deducting for any dividends that may be paid out, this is the amount that is brought into the balance sheet and placed into retained earnings.
Extraordinary items are significant events or transactions that are both unusual in nature and infrequent in occurrence. They are reported separately on the income statement to highlight their non-recurring nature and their impact on the company's financial performance.
Discontinued operations Or Other Income
It is possible for businesses to make income through activities that are not central to their operations. This income is one that must be reported on the income statement since it is subject to taxation. On the other hand, it is not counted as revenue because it is not an essential part of the business operations. Take, for instance, the case of the automobile manufacturer. The manufacturing and retailing of automobiles represent the primary activities of a car firm. However, a significant number of automakers also derive income from another source, namely financing. When a car firm gives its clients the option to finance the payments on a vehicle, the interest rate attached to the loan determines how much the consumer will pay each month. That interest is given to the automobile firm. This interest must be reported on your tax return since it is considered taxable income. However, because this income does not directly contribute to the operation of the firm, we do not count it among our revenues; rather, we refer to it as "other income."
Another typical type of additional revenue is referred to as "income from noncontrolling interests," which is also known as "income from unconsolidated affiliates." This is the income that one firm receives when it has an investment in another company in which it does not control the other company. Therefore, in the event that one business (we'll call it Company A) invests in another business (we'll call it Company B) and obtains a minority interest in Company B, Company B is obligated to pay Company A a percentage of its net profits. The distributions received by Company A are categorised as other income on their books.
Basic Earnings Per Share (EPS)
Earnings per share, or EPS, is calculated by dividing a company's net income by the total number of shares that are currently in circulation. A corporation will normally report both a basic and a diluted earnings per share figure, with each figure being divided by either the basic or the diluted number of shares. When calculating earnings per share (EPS), it is essential to keep in mind that the definition of "exactly what to include in net income" can vary from one company to the next. To put it another way, does one use the net income before or after taking into account the non-controlling interests? Or before or after dividends? When discussing investments, it is usual practise to discuss net income prior to the payment of dividends but after the payment of investors holding non-controlling interests. However, we advise looking into the company's past earnings per share to determine the precise formula that is being used by the company.
Formula: Basic EPS = Net Income / Basic Shares
Diluted Earnings Per Share (DEPS)
The earnings per share (EPS) of a company can be evaluated more accurately with a calculation known as "diluted EPS," which assumes that all convertible securities will be converted into cash. Convertible preferred shares, convertible debentures, stock options, and warrants are all examples of convertible securities that are currently in circulation.
Formula: Diluted EPS = Net Income / Diluted Shares
Share Outstanding (Basic and Diluted)
On the income statement of a firm, the number of outstanding shares can be reported either in basic form or in diluted form. A count of the number of shares that are still active on the market is what is meant by the term "basic share count." The number of shares that are currently traded in the market is known as the basic share count. The basic share count is increased by any shares that would be considered outstanding today if all option and warrant holders who currently hold securities that are profitable decided to exercise on their holdings. The best way to approach the fully diluted share count is to think of it as a "What if?" scenario. How many more shares would be available to buy if all the people who currently hold options and warrants decided to exercise their rights?
Depreciation and Amortization
Depreciation is the process of keeping track of how fixed assets age and wear out over time. Amortization is the process of keeping track of how the cost of intangible assets like patents, copyrights, and trademarks goes down over the course of their useful life.
EBITDA is an acronym that stands for Earnings before Interest, Tax, Depreciation, and Amortization. This type of income statement is not included in all financial reports. To determine it, take the gross profit and deduct the costs of selling, general, and administrative activities (not including amortisation and depreciation).
Walmart Income Statement From 10k
Beginning at the very top, we can see that Walmart Inc. derives their total revenue from two distinct revenue streams, which they refer to as net sales and membership and other income respectively.
There is no subtotal for the gross profit because the cost of sales is combined with all of the other expenses, which include general and administrative costs (G&A).
After deducting all of the expenses mentioned above, we are finally able to arrive at the first subtotal on the income statement, which is the Operating Income (also known as EBIT or Earnings Before Interest and Taxes).
Everything listed below "Operating Income" does not pertain in any way to the day-to-day operations of the company, such as "non-operating expenses" such as "Interest," and "provision for income taxes."
Frequently Asked Questions (FAQs)
What is an income statement?
An income statement, also known as a profit and loss statement, is a financial statement that summarizes a company's revenues, expenses, gains, and losses over a specific period. It provides information about the company's financial performance and profitability.
What is the purpose of an income statement?
The primary purpose of an income statement is to assess a company's financial performance by showing the revenues generated and expenses incurred during a specific period. It helps stakeholders, such as investors, creditors, and management, to evaluate the company's profitability and make informed decisions.
What is the difference between revenue and net income?
Revenue, also referred to as sales, represents the total amount of money earned from the sale of goods or services. It is the top-line figure on the income statement. Net income, on the other hand, is the final line item on the income statement and represents the profit earned by the company after deducting all expenses and taxes. It is the bottom-line figure and indicates the company's overall profitability.
What are operating expenses?
Operating expenses are the expenses incurred in the day-to-day operations of a business. They include items such as salaries, rent, utilities, marketing expenses, research and development costs, and other overhead expenses. Operating expenses are subtracted from gross profit to calculate operating income.
What is the difference between gross profit and net profit?
Gross profit is the difference between revenue and the cost of goods sold (COGS). It represents the profit generated from core business operations before considering operating expenses. Net profit, on the other hand, is the profit earned after deducting all expenses and taxes, including operating expenses, interest expenses, and income taxes. It reflects the company's overall profitability.
What is EBITDA?
EBITDA stands for Earnings Before Interest, Taxes, Depreciation, and Amortization. It is a measure used to assess a company's operating performance by excluding non-operating factors and focusing on core profitability. EBITDA provides a snapshot of a company's ability to generate cash flow from its operations.
Why are extraordinary items reported separately on the income statement?
Extraordinary items are significant events or transactions that are both unusual in nature and infrequent in occurrence. They are reported separately on the income statement to highlight their non-recurring nature and their impact on the company's financial performance. By presenting extraordinary items separately, the income statement provides a clearer picture of the company's ongoing operational performance.
How can I analyze an income statement?
When analyzing an income statement, you can focus on several key aspects. Look at the revenue trends to assess the company's sales growth. Examine the gross profit margin to understand how efficiently the company generates revenue. Review the operating expenses to identify areas of cost control or potential inefficiencies. Assess the net profit margin to evaluate the company's overall profitability. Additionally, comparing the income statement with previous periods and industry benchmarks can provide valuable insights into the company's financial performance.