INCOME

STATEMENT
INCOME STATEMENT

• An income statement is one of the three important financial statements used

for reporting a company's financial performance over a specific accounting
period, with the other two key statements being the balance sheet and the
statement of cash flows.
• Also known as the profit and loss statement or the statement of revenue and
expense, the income statement primarily focuses on the company’s revenues
and expenses during a particular period.
• The income statement focuses on four key items—
revenue, expenses, gains, and losses. It does not
differentiate between cash and non-cash receipts (sales in
cash versus sales on credit) or the cash versus non-cash
payments/disbursements (purchases in cash versus
purchases on credit). It starts with the details of sales, and
then works down to compute the net income and
eventually the earnings per share (EPS). Essentially, it gives
an account of how the net revenue realized by the
company gets transformed into net earnings (profit or
loss).
REVENUES AND GAINS

• The following are covered in the income statement,

though its format may vary depending upon the local
regulatory requirements, the diversified scope of the
business and the associated operating activities:
• Operating Revenue
• Non-Operating Revenue
• Gains
OPERATING REVENUE

• Revenue realized through primary activities is often referred to as

operating revenue. For a company manufacturing a product, or for
a wholesaler, distributor or retailer involved in the business of
selling that product, the revenue from primary activities refers to
revenue achieved from the sale of the product. Similarly, for a
company (or its franchisees) in the business of offering services,
revenue from primary activities refers to the revenue or fees
earned in exchange of offering those services.
NON-OPERATING REVENUE

• Revenues realized through secondary, non-core business activities

are often referred to as non-operating recurring revenues. These
revenues are sourced from the earnings which are outside of the
purchase and sale of goods and services and may include income
from interest earned on business capital lying in the bank, rental
income from business property, income from strategic
partnerships like royalty payment receipts or income from an
advertisement display placed on business property.
GAINS

• Also called other income, gains indicate the net money

made from other activities, like the sale of long-term
assets. These include the net income realized from one-
time non-business activities, like a company selling its old
transportation van, unused land, or a subsidiary company.
EXPENSES AND LOSSES

• The cost for a business to continue operation and

turn a profit is known as an expense. Some of
these expenses may be written off on a tax return if
they meet the IRS guidelines.
PRIMARY ACTIVITY EXPENSES

• All expenses incurred for earning the normal operating

revenue linked to the primary activity of the business.
They include the cost of goods sold (COGS), selling,
general and administrative expenses
(SG&A), depreciation or amortization, and research and
development (R&D) expenses. Typical items that make up
the list are employee wages, sales commissions, and
expenses for utilities like electricity and transportation.
SECONDARY ACTIVITY EXPENSES

• All expenses linked to non-core business

activities, like interest paid on loan money.
LOSSES AS EXPENSES
• All expenses that go towards a loss-making sale of long-term assets, one-time or any
other unusual costs, or expenses towards lawsuits.
• While primary revenue and expenses offer insights into how well the company’s core
business is performing, the secondary revenue and expenses account for the
company’s involvement and its expertise in managing the ad-hoc, non-core activities.
Compared to the income from the sale of manufactured goods, a substantially high-
interest income from money lying in the bank indicates that the business may not be
utilizing the available cash to its full potential by expanding the production capacity,
or it is facing challenges in increasing its market share amid competition. Recurring
rental income gained by hosting billboards at the company factory situated along a
highway indicates that the management is capitalizing upon the available resources
and assets for additional profitability.
INCOME STATEMENT STRUCTURE

• Mathematically, the Net Income is calculated based

on the following:

Net Income = (Revenue + Gains) – (Expenses + Losses)

SINGLE-STEP INCOME STATEMENT

• A single-step income statement offers a simplified snapshot of a company’s

revenue and expenses. This straightforward document merely conveys a
company’s revenue, expenses, and bottom-line net income. All revenues and
gains are totaled at the top of the statement, while all expenses and losses
are totaled at the bottom. This simplified approach makes record-keeping
easier for both the accountants who prepare the statements and the investors
who read them. Shareholders need only focus on the net income figure, to
gauge a company's overall vitality.
MULTIPLE-STEP INCOME STATEMENTS

• Most publicly-traded companies use multiple-step income statements, which

categorize expenses as either direct costs (also known as non-operational costs),
or indirect costs (also known as operational costs).
• Direct costs refer to expenses for a specific item, such as a product, service, or
project.
• Contrarily, indirect costs are generalized expenses that go towards a company’s
broader infrastructure, and therefore cannot be assigned to the cost of a specific
object. Examples of indirect costs include salaries, marketing efforts, research and
development, accounting expenses, legal fees, utilities, phone service, and rent
• The breakdowns in multiple-step income statements allow
for deeper analysis of margins and provide more accurate
representations of the costs of goods sold. Such specificity
gives stakeholders a sharper view of how a company runs
its business, by detailing how the gross, operating, and net
margins compare.
INCOME STATEMENTS FORMULA

• The income statement is one of the major financial statement for a

business which shows its expenses, Revenue, profit and loss over a
period of time. Profit or loss is determined once all the expenses of
the company are subtracted from Revenue or sales for that period.
It is also known as Profit & Loss statement, statement of earnings,
and statement of income. There are generally used equation which
is derived from the income statement:
FORMULAS:

• Gross Profit = Revenue – Cost of Goods Sales (COGS)

• Operating profit = Earnings before Interest & Tax (EBIT) =
Sales – COGS – Operating expenses
• Net Profit = Revenue – All expenses
• Every business has to generate money. For that, they have to sell
the product/services they are providing and has to bear expenses,
interest payments on loan, taxes, etc. After all the required costs
are paid, the amount in hand will be Net income. This is the
amount which is available to shareholders. Businesses usually
retain that amount and invest back in the business and only pay
dividends to the shareholders. Following is the simple income
statement format:
Net Sales
-Cost of Sales
Gross Income
-Selling, General and Administrative Expenses (SG&A)
Operating Income
+/- Other Income & Expenses
Pretax Income
– Taxes
Net Income (after tax)
NET INCOME

• Net income is total earning or profit. It is the net income or

Revenue Company is generating after paying all expenses, interest,
taxes, dividend to the investor. The net income is calculated from
the income statement. Net income tells about the profit or losses
of a company also help to find profitability and grow of the
company. Investors, stakeholders analyze net income and its trend
to take the decision of investment and decision related to growth
and expansion of the company.
NET INCOME FORMULA

• Net Income = Revenue – Cost of goods sold – Operating

expense – Gain and losses – Other revenue expense +/-
Income/loss from the operations of a discounted
component +/- Gain/loss from disposal of a discounted
component
NET INCOME FORMULA
• In short, Net income is total revenue minus total expense, which can be
written as:-

Net Income= Total Revenue- Total Expense

Where,
• Revenue: It is the actual amount the company earned over a period of time.
• Expense: It means what the company pays for an operational expense, salary
for the employee, taxes on income, interest etc.
NOW, LET’S SEE AN EXAMPLE TO
UNDERSTAND THE NET INCOME FORMULA.

Net Income Formula – Example #1

Suppose a company named MILO Pvt. Ltd has a total revenue of $100,000 and
a total expense of $45,800.
Net Income of the MILO Pvt. is Calculated using below formula-

• Net Income = Total Revenue – Total Expense

• Net Income = $100,000 – $45,800
• Net Income = $54,200
Net Income Formula – Example #2

A company has revenue of $50,000, the cost of goods sold is $15,000,

operating expense $5,000, and loss from the operations of a discounted
component is $1,200.

Net Income of the company is calculated using below formula-

• Net Income = Total Revenue – Total Expense
• Net Income = $50,000 – ($15,000 + $5,000 + $1,200)
• Net Income = $50,000 – $21,200
• Net Income = $28,800
• The net income is a simple formula which measures excess revenue
above total expense. One can use the gross profit to calculate net
income; gross profit is total revenue minus cost of goods sold. All
revenue and all expense of the company are included while calculating
net income. Net income provides information about the ratio
for financial ratio analysis and financial statement analysis. Through
these analyses, one can measure the financial health and financial
position of the company. Net income also tells stakeholder whether the
company will be able to pay dividend or not. Net income helps to
measure and calculate earnings per share, the profitability of the
company and helps the investor to take the decision of investment.
• There are few financial ratios which are calculated
using income statement and are very helpful
for financial analysis. These ratios are
called Profitability ratios.
• Profit Margin Ratios: These ratios compare various
profits of the business (gross profit, operating
profit, net profit etc.) with its sales
FORMULAS FOR INCOME STATEMENT:
1. Gross Profit Margin = (Gross Profit / Sales) * 100
Gross Profit = Sales – COGS
2. Operating Profit Margin = (Operating Profit / Sales) * 100
Operating profit = Earnings before Interest & Tax (EBIT) = Sales –
COGS – Operating expenses
3. Net Profit Margin = (Net Profit / Sales) * 100
Net Profit = Revenue – All Expenses
EXAMPLE #1
A COMPANY ABC INC. HAS FOLLOWING ITEMS ON ITS BALANCE
SHEET. CALCULATE THE INCOME STATEMENT FORMULA FOR THE
SAME.

Now let’s calculated all the ratios one by one:

Gross Profit Margin is calculated using the formula given
below

Gross Profit Margin = (Gross Profit / Sales) * 100

Gross Profit Margin = ($400 / $1000) * 100

Gross Profit Margin = 40
 Operating Profit Margin is calculated using the formula given below

Operating Profit Margin = (Operating Profit / Sales) * 100

Operating Profit Margin = ($200 / $1000) *100

Operating Profit Margin = 20

Net Profit Margin = (Net Profit / Sales) * 100

Net Profit Margin = ($140 / $1000) * 100

Net Profit Margin = 14
EXAMPLE # 2
WITH THE HELP OF INCOME STATEMENT, WE
HAVE THE FOLLOWING INFORMATION FOR
THE YEAR 2018:
Now let’s calculated all the ratios one by one:
Gross Profit Margin is calculated using the formula given
below

Gross Profit Margin = (Gross Profit / Sales) * 100

Gross Profit Margin = ($1,259,786,700 / $2,942,425,700) *100

Gross Profit Margin = 42.81
Operating Profit Margin = (Operating Profit / Sales) * 100
Operating Profit Margin = ($117,875,100/ $2,942,425,700) * 100
Operating Profit Margin = 4.01

Net Profit Margin = (Net Profit / Sales) * 100

Net Profit Margin = ($90,913,600 / $2,942,425,700) * 100
Net Profit Margin = 3.09