What is an Income Statement?
Income Statement Definition
An income statement is also known as a profit and loss statement or P&L, is a financial document that provides a summary of a company’s revenues, expenses, and profits over a specific period, typically a quarter or a year. It offers a snapshot of a company’s financial performance during that time frame.
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Why an Income Statement is Important?
The primary purposes of an income statement are:
1- Evaluating Profitability: It helps assess whether a company is making a profit or incurring losses during a specific period.
2- Financial Analysis: Investors and analysts use income statements to analyze a company’s financial health and performance.
3- Decision-Making: Business owners and managers rely on income statements to make informed decisions about operations, pricing, and investments.
Income Statement Formula
The income statement's fundamental equation is Revenues - Expenses = Net Income, which indicates the company's profitability. If revenues exceed expenses, the business is profitable.
How to Read & Understand an Income Statement
An income statement typically works through the following steps:
1- Revenue Generation
The company generates revenue through its core operations, such as selling products or services.
2- Costs and Expenses
The company incurs various costs and expenses, including production costs, salaries, marketing expenses, and interest payments and other daily costs.
3- Gross Profit
Gross profit is calculated by subtracting the cost of goods sold (COGS) from total revenue. It represents the profit before deducting operating expenses.
4- Operating Expenses
Operating expenses, also known as selling, general, and administrative expenses (SG&A). It include all costs not directly related to making or providing goods and services such as rent, utilities, salaries, and marketing.
Operating Income=Gross Profit−Operating Expenses
5- Operating Income (Operating Profit)
Operating income or Operating Profit is determined by subtracting operating expenses from gross profit. It reflects the profit generated from a company’s core operations.
6- Other Income and Expenses
This section includes items like interest income, interest expenses, and other non-operating income or expenses.
7- Net Income
The net income, which is the ultimate figure on the profit and loss statement, reflects the total profit or loss for the given period. It represents the company’s overall profit or loss after accounting for all revenue, expenses, and taxes.
Net Income=Operating Income+Other Income−Other Expenses
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What Impact Does an Income Statement Have?
An income statement provides critical insights into a company’s financial performance, which can have several impacts:
| Impact on Companies | Impact on Investors |
| Helps companies assess their financial health and profitability. | Aids investors in evaluating a company’s performance and potential returns on investment. |
| Informs strategic decisions related to cost management and pricing strategies. | Influences investment decisions, including buying, selling, or holding stocks or bonds. |
| Can impact a company’s ability to attract investors or secure loans. | Helps investors make informed decisions about portfolio allocation and risk management. |
Income Statement Examples
Company: Aditya Vision Ltd
Understanding Income Statements for the year ended 31,2023.
| Revenue (INR Cr.) | Expenses | Net Income |
| 1322 | 1258 | 64 |