Income statement (also referred to as (a) statement of income and expense or (b) statement of profit or loss or (c) profit and loss account) is a financial statement that summaries the results of a company’s operations for a period. It presents a picture of a company’s revenues, expenses, gains, losses, net income and earnings per share (EPS).
A typical income statement is in report form. The header identifies the company, the statement and the period to which the statement relates, the reporting currency and the level of rounding-off. The header is followed by revenue and cost of goods sold and calculation of gross profit. Further down the statement there is detail of operating expenses, non-operating expenses, and taxes and eventually the statement presents net income differentiating between income earned from continuing operations and total net income. In case of a consolidated income statement, a distribution of net income between the equity-holders of the parent and non-controlling interest holders is also presented. The statement normally ends with a presentation of earnings per share, both basic and diluted. Important line items such as revenue, cost of sales, etc. are cross-referred to the relevant detailed schedules and notes.
There are two types of income statements: single-step income statement, in which there are no sub-totals such as gross profit, operating income, earnings before taxes, etc.; and multi-step income statement, in which similar expenses are grouped together and intermediate figures such as gross profit, operating income, EBIT, etc. are calculated.
Another classification of income statement depends on whether the expenses are grouped by their nature or function. Income statement by nature classifies expenses according to their nature i.e. without allocating them to different business activities, while income statement by function classifies expenses according to the business operations that they support. For example, income statement by nature shows line items such as salaries, depreciation, rent, etc., while income statement by function allocate salaries, depreciation, rent, etc. between cost of good sold, selling expense, general and admin expenses, etc.
- Revenue: represents the amount earned by the company in exchange of goods it supplied and services it provided. When there are few sources of revenue, a breakup may appear on the face of the income statement; otherwise, a separate note provides a complete picture.
- Cost of sales: represents the cost of goods sold and services provided. It includes all such costs that can be traced or assigned to goods sold or services provided. Examples include raw materials, salaries of factory or service shop employees, manufacturing facility rent, depreciation of manufacturing equipment, lease rentals on equipment used in manufacturing or service delivery, indirect materials needed for production, etc. Typically, a separate note provides a complete break-up of cost of sales.
- Gross profit = revenue – cost of sales; it represents the profit earned on the goods and services of the company before any selling, general and administrative expenses and finance costs are accounted for.
- Operating expenses: mainly include selling and distribution expenses and general and administrative expenses. Examples include salary of the CEO, marketing expenses, office rent, salaries of administrative staff, fuel for delivery vehicles, etc.
- Operating profit: (equivalent to earnings before interest and taxes (EBIT)) = gross profit – operating expenses; as the name suggests, it is the profit after cost of sales and all operating expenses have been charged to revenue. It is before any adjustment for interest or investment income and interest expense and taxes.
- Income from continuing operations = EBIT – taxes; it represents the net income (i.e. after-tax income) earned from business components that the company intends to own in the future. It excludes any income earned during the year from business components that are treated as discontinued operations. Income from continuing operations provides a picture of the company’s continuing earning capacity.
- Income from discontinued operations: is the after-tax income of business components which the company has disposed-off during the year or has classified as held-for-sale at the year-end.
- Net income = income from continued operations + after-tax income from discontinued operations; a company’s total net income includes income from both continued operations and discontinued operations. It represents the income earned during the year after accounting for all expenses. It is carried to statement of changes in shareholders’ equity where it is added to opening balance of the retained earnings component of equity.
- Distribution of income: a consolidated income statement provides a statement of how the income is distributed between parent and minority shareholders.
- Earnings per share (EPS): is a critical part of income statement for companies that are required to calculate and present their EPS (mainly companies listed on a stock exchange). Both basic EPS and diluted EPS are reported, where basic EPS = (net income – preferred dividends)/weighted-average number of common shares.
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