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What is the Income Statement?

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Synopsis:

The income statement (also known as the profit and loss account) is one of the most important financial disclosures made by listed companies. The income statement provides the revenues, income, expenses, and taxes of a company. It helps us analyse whether a company is able to run its business profitably or not.
 

All listed companies in India are required to file their income statement at the end of every quarter and at the end of every financial year. If you are an investor, you should thoroughly analyse the income statement of companies before investing in them.

A company’s income statement is one of its most important financial statements. It shows the revenue, expenses, and taxes of a company for a particular period. Based on these items, its net profit or loss for that period is calculated.

While talking about the income statement, we must keep certain things in mind. First, an income statement is prepared on an accrual basis. This means that all the expenses that a company is supposed to pay in a period have to be recorded in it, whether or not they have been paid.

Similarly, all its revenue and income have to be included in the income statement, whether or not it has actually received them.

Second, an income statement includes all expenses, whether they are operating or non-operating. By operating, we mean expenses directly related to a company’s operations. By non-operating, we mean expenses not directly related to a company’s operations. Similarly, an income statement includes all sorts of revenue and income, both operating and non-operating. Having understood the meaning of the income statement, let us delve deeper into this topic and discuss the components and example of the income statement in the context of the Indian stock market.

Components of the Income Statement

The most important components of the income statement are explained below:

  • Revenue from operations: This means the sales earned by a company by selling its products or services in a financial period.

  • Cost of Goods Sold: The costs incurred on manufacturing goods sold in the market are known as the cost of goods sold.

  • Gross Profit or Loss: Gross profit or loss is calculated by deducting the cost of goods sold from the revenues of a company.

  • Marketing-related Expenses: As the name suggests, all the expenses related to the marketing of products and services come under this head.

  • Selling, General, & Administrative Expenses: All expenses related to selling products + all expenses incurred on general and administrative purposes (e.g., rent of office premises and salary of employees) come under this head.

  • Depreciation & Amortisation: The wear and tear of tangible assets (depreciation) and reduction in the value of intangible assets (amortisation) are also recorded in the income statement.

  • Interest: When a company raises debt, it has to pay interest, which is shown in the income statement.

  • Other Expenses: Any other expenses, whether operating or non-operating, are also recorded in the income statement.

  • Other Income: Any other income, whether directly or indirectly related to the operations of a company, is shown under this head in the income statement.

  • Income Taxes: Then, we have income taxes, which are payable on profit before taxes. However, if a company has incurred a loss in a financial year, it does not have to pay income taxes.

  • Net Profit or Loss: After we reduce income taxes from profit before taxes, we get net profit or loss for a financial period.

Significance of the Income Statement

The income statement is one of the most important financial disclosures made by companies for the reasons explained below:

  • The ultimate objective of running a business is to earn a profit. It is the income statement that tells us whether a company is able to make a profit or not.

  • An income statement tells us how well a company is running its business. In other words, how well it is selling its products or services, how well it is managing its expenses and tax liability, and whether it is able to earn a profit for a financial period.

  • An income statement provides us with a breakup of a company’s revenue in terms of revenue from operations and non-operating income. This helps us analyse to what extent the company’s operational and non-operational income are contributing to its total revenue.

  • Similarly, an income statement provides us with a breakup of a company’s expenses into operational and non-operational expenses.

  • By comparing a company’s revenue and expenses provided by its income statement over a period, we can examine whether it is running its business well or not.

Income Statement Example

Find below an example of the standalone income statement (standalone statement of profit and loss) of Britannia Industries, taken from the company’s Annual Report for FY 2023-24.

STANDALONE STATEMENT OF PROFIT AND LOSS
(All amounts in Rs. Crores, unless otherwise stated)
 31-Mar-2431-Mar-23
I. Revenue from operations  
      Sale of goods15,938.8715,285.12
      Other operating revenues247.21333.3
Total Revenue16,186.0815,618.42
II. Other income210.11220.59
III. Total Income (I+II)16,396.1915,839.01
IV. Expenses:  
      Cost of materials consumed7,394.747,084.09
      Purchases of stock-in-trade2,033.362,453.42
      Changes in inventories0.01-82.13
      Employee benefits expense565.28520.55
      Finance costs151.4154.95
      Depreciation and amortisation271.19195.1
      Other expenses3,121.872,900.70
Total expenses13,537.8513,226.68
V. Profit before exceptional items and tax (III-IV)2,858.342,612.33
VI. Exceptional items2.9-227.74
VII. Profit before tax (V-VI)2,855.442,840.07
VIII. Tax expense  
      (i) Current tax760.7708.5
      (ii) Deferred tax12.69-7.73
Total tax expense773.39700.77
IX. Profit for the year (VII-VIII)2,082.052,139.30
  • Here, revenue from operations is arrived at by adding the sale of goods to other operating revenues. The company’s annual report says that other operating revenues are arrived at by adding royalty income to scrap sales.

  • Then, we have all the expenses listed under the head “Expenses.” It starts with expenses related to the manufacturing of products, like the cost of materials consumed, purchases of stock-in-trade, and change in inventories.

  • After this, we have expenses incurred on running an office, like employee benefits expense, finance costs, depreciation and amortisation expense.

  • Then, we arrive at the profit before exceptional items and tax.

  • After this, we have exceptional items. These are non-recurring in nature and can be either an income or an expense. As per the annual report, exceptional items comprise of voluntary retirement cost and gains on the sale of investments.

  • Then, we have profit before tax, which is followed by tax expense. Finally, we have profit for the year.

Conclusion

It is not difficult to understand the meaning of the income statement. However, you should analyse it carefully because a poorly analysed statement will provide you with misleading insights. While analysing an income statement, you must read the notes under the financial statements because they provide the break-up of several income and expenses. The notes can also help you understand why certain line items are changing significantly from one year to another.

Disclaimer: Investments in the securities market are subject to market risk, read all related documents carefully before investing. This content is for educational purposes only. Securities quoted are exemplary and not recommendatory.

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Frequently Asked Questions

What is an income statement and why is it important?

Answer Field

A company’s income statement provides us with its revenue, expenses, taxes, and net profit or loss for a financial period. It helps us analyse whether a company is able to run its operations profitably or not.

What are the main components of an income statement?

Answer Field

The main components of an income statement include Revenue from operations, Cost of Goods Sold, Selling, General, & Administrative Expenses, Depreciation & Amortisation, Interest Expense, Income Taxes, and Net Profit or Loss.

How do you read and interpret an income statement?

Answer Field

You need to understand what each and every line item of an income statement means. For this, you should thoroughly read the notes to financial statements provided in an annual report. You should also check how various income and expenses are changing over the years and what is causing that change.

What is the difference between an income statement and a balance sheet?

Answer Field

An income statement provides the revenue, expenses, income, and taxes of a company for a financial period. However, a balance sheet provides us the data about the assets, liabilities, and share capital of a company on a particular date.

How often should an income statement be prepared?

Answer Field

As per the regulations in India, listed companies should prepare an income statement at the end of every quarter. Further, such companies must prepare an income statement at the end of every financial year.

Can an income statement help in tax planning?

Answer Field

Yes, an income statement can help a company in tax planning. By seeing all the expenses for a year, a company can understand which expenses are tax-deductible and which ones are not. If a business has incurred a loss in a financial period, it should check the rules to see if it can carry forward that loss to reduce its tax liability in the next financial period.

What are some common mistakes to avoid when preparing an income statement?

Answer Field

At times, people end up using both the accrual and the cash system of accounting to prepare an income statement. Remember that an income statement is prepared based on the accrual system of accounting and not the cash system.

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