Statement of Income

Financial statements give a preview of the financial health of a company. The three commonly known financial statements are the statement of financial position, the income statement, and the cash flow statement. This blog will be about the income statement.

The income statement, also known as the Profit and Loss (P/L) statement, outlines the total revenue and expenses incurred over a financial year. The net income, or profit (or loss), is calculated by deducting all expenses, including interest and taxes, from the total revenue.

To understand the income statement let us take an example of a fictitious company, ‘ABC Industries’.

Consolidated Statement of Income

(in thousands of Dollars)

Common terminologies in the Income statement

Gross profit is calculated by subtracting the cost of goods sold from the sales revenue. Operating profit is the same as EBIT. Depreciation is an accounting measure that represents the decline in the value of fixed assets over time, and there are different methods for calculating depreciation for a fixed asset.

When calculating depreciation, the simplest method is the 'straight-line method'. For example, if a machine is purchased for $120,000 and is expected to operate efficiently for 5 years with a salvage value (expected selling price of the machine after 5 years) of $20,000, the annual depreciation for each of the 5 years can be calculated by subtracting the salvage value from the purchase price and then dividing the result by 5.

Net income in corporations is often divided into retained earnings and dividends. Publicly listed companies share profits with the shareholders by paying them dividends, which are a portion of the profits earned by the corporation. The remaining profits are added to the retained earnings for use in future investments.

Disclaimer: The description above is written by the author based on the knowledge attained from years of reading and teaching experience from various books and articles.