An income statement (also called a statement of profit or loss) presents information about revenues and expenses of a company. Under both IFRS and US GAAP, the income statement can either be presented separately or integrated with the statement of comprehensive income.
The basis equation underlying an income statement is:
Net\ Income = Revenues – Expenses
Format and components of income statement
The top line of an income statement shows revenues (also called sales or turnover), amounts charged by companies for delivery of goods and services from ordinary activities of a business. These are reported after adjustments (such as discounts, consumption-based taxes), hence it is sometimes referred to as net revenue.
Expenses reflect outflows, depletion of assets, or incurrence of liabilities.
Net income is presented at the bottom of the income statement; hence, it is also called the bottom line. It also includes gains and losses, which are items that arise from activities other than the ordinary activities of the business.
Net income is often followed by a distribution of income attributable to parent, and non-controlling interest. A more comprehensive income statement equation would look like as follows:
NI = R – E + OI – OE + G – L
Where NI is net income, R stands for revenues, E for expenses, OI for other income, OE for other expenses, and G and L refers to gains and losses, respectively.
Classification of expenses by nature and function
Some items such as revenue, finance costs, taxes, etc. must be reported separately. Expenses may be grouped either by nature (such as depreciation, salaries) or by function (cost of goods sold, administrative expenses, etc.).
Income statements may also show intermediate figures and subtotals, such as gross profit (also called gross margin) which equals revenues minus cost of sales), operating profit, which equals gross profit minus operating expenses.
Single-step income statement vs multi-step income statement
The composition of the operating expenses depends on the nature of the company’s business. For example, a bank would include interest in operating expenses while other companies would not. Such an income statement that shows intermediate figures is called a multi-step income statement. If there are no intermediate calculations, it is called a single-step income statement.
Difference between operating profit and earnings before interest and taxes (EBIT)
Even though operating profit is sometimes referred to as EBIT (earnings before interest and taxes). However, they are not necessarily the same. Further, some companies may have financial years based on the number of weeks. While this may not impact the annual growth figures too much, they are more relevant when making quarterly analysis.