Accounting Fundamentals: Income Statement

Financial statements are one of the most reliable data points to assess a company's financial position and performance. Companies listed on the stock exchange provide quarterly financial statements such as, Balance Sheet, Profit and Loss (income) Statement, Statement of Cash flow

Profit and Loss (income) Statement:

The income statement, also known as the profit and loss statement, tells you about the income and expenses that a company has incurred over a period of one financial year. 

Note: While calculating the gross profit, it is more accurate to consider the 'total operating revenue' instead of 'total revenue', because 'Other income' may skew the 'total revenue' on certain years.

Revenue: The amount earned by a company after selling its core products and services.

Expense: The amount spent by a company to conduct business. A key line item inside expenses is cost of goods sold (COGS), which is the cost incurred in the production of the goods or services sold.

Gross profit: Assesses the efficiency of a company in utilising its labour and raw materials. It is calculated as follows:

Gross profit = Sales revenue - Cost of goods sold (COGS)

Operating profit (EBIT): Shows the profit earned by a business from its core operations before interest and tax expenses. It is calculated as follows:

Operating profit = Sales revenue - Cost of goods sold (COGS) - Operating expenses

Net profit: It is also known as "Net Income" or Profit after tax (PAT). It refers to the income earned by a company after covering all operating and non-operating expenses. It is calculated as follows:

Net profit =  Total revenue - Total expenses

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