Know what a profit and loss statement is and how it reflects the company’s performance
An income statement is a financial statement that shows you the company’s income and expenditures. It also shows whether a company is making profit or loss for a given period. The income statement, along with balance sheet and cash flow statement, helps you understand the financial health of your business.
What is an income statement?
Income statement is a statement of income, one of the financial statements that reports on income, expenses, profit and loss for each accounting period. which reflects the efficiency of the company’s operations. It can also be used to forecast future performance as well.
- Total Revenue is the sum of: income, interest income, dividends or other income, etc.
- Total expenses (Total Expenses) come from the sum of: costs of sales of goods and services, finance costs or taxes, etc.
Income statement calculation example
Note: Another common profit is EBITDA. It is operating profit but includes depreciation and amortization. It is calculated from EBIT + depreciation and amortization.
- Revenue from sales and services ( Sale) is the main income of the business. Also known as operating income.
- Other income ( • Other, Revenue) is revenue that does not come from operations such as interest on capital in the bank, revenue from the sale of assets and so on.
- Cost of goods sold ( to Cost Of Goods SOLD) is the cost of the product.
- The cost of sales ( a Selling Expenses) the costs relating to the sale of goods, such as advertising costs, transportation costs, salaries of employees, and so on.
- Administrative expenses ( Administrative Expenses) are expenses related to administration such as salaries of employees that are not related to the sales department, office rent, etc.
- Gross profit ( Groß profit’s) of the profit from sales minus the cost of goods sold. or is the difference between the trading price
- Earnings before finance costs and income taxes ( EBIT) are operating profits.
- Earnings before income tax ( EBT) is profit from operations after deducting financial expenses.
- Net profit ( the .Net Income) is revenue less cost of everything.
Income statement can be obtained as follows:
- Revenue from sales and services – Cost of sales = Gross profit
- Gross Profit + Other Revenue – Selling Expenses – Administrative Expenses = EBIT
- EBIT – Finance cost = EBT
- EBT – Tax Expenses = Net Profit
How to view income statement values
- Income > Expenses means that the company can generate returns for shareholders with a net profit.
- Income < Expense means the company loses. and unable to generate returns for shareholders, net loss
TIPS : The company should have a steady growth in net profit showing the efficiency of the company.