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Income Statement

Income statement in simpler term means profit-loss statement. It sums up whether a company is making profit or losing money for a specific period of time. Here, reader can obtain information such as company’s revenue, cost of goods sold, marketing expense, administrative expense, interest income and so on.

The simplest equation to represent an income statement is through the equation below:

Net income (profit / loss) = Total revenue – Total Expenses

When revenues > expenses, the company makes profit and vice versa.

Example of income statement. Format of income statement.

Generally, all of the income statements reported by listed companies follow a format as above.

Sales revenue: This is the primary revenue of a company. For instance, a manufacturer’s primary revenue is obtained by selling off the products it manufactured. A bakery for instance, has its sales revenue through selling out bread and cakes that are made.

Cost of goods sold: How much does the raw material to make products cost? A bakery shop need raw materials such as flour, milk, egg and sugar to produce breads or cakes. All these raw materials are the cost of goods sold. For instance, it takes RM3 to make a cheesecake, and the bakery now sell it at RM6. So RM3 is the cost of goods sold, and RM6 is the sales revenue.

Gross profit: (Sales revenue – Cost of goods sold) This is an easy math, generally how much a company earns by deducting the raw material cost. Gross profit margin can be calculated here, through dividing gross profit by sales revenue. This ratio will then be used to compared to peer industry. A higher gross profit margin generally indicates the company is more efficient.

Operating expense: All kind of expenses such as salaries, wages, advertising expense, utilities, commission expense are considered in this category.

Operating income: (Gross profit – operating expenses) In smaller firm where there is no more additional revenue / expense, operating income could also be the EBIT (Earning Before Interest & Tax) for a company. EBIT generally gives us an idea whether a company is capable in paying off the debt’s interest it owed. Investor usually calculate “Interest Coverage Ratio” to determine if a company is financially healthy and is capable of paying off the debt’s interest.

Non-operating revenue / expense: These are the transactions that earns / pays money outside of primary business. For instance, a company rents out its vacant warehouse / a company sells off its unused equipment.

Net income: This shows the final amount of profit / loss that is dedicated to a company and shareholders. If a company is making profit, a part of the net income may be rewarded to the shareholders through dividend payment. Meanwhile, the leftover will normally be used to reinvest back into the company to generate more income in future.

Example of an income statement

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