• Income Statement

    The income statement or the profit and loss statement denotes the revenues with source, different types of expenses to achieve the revenue, tax payment, interest payment and profit or loss for a particular period.

    Revenue is the cash inflows or the amounts generated from the sale of products or services over the normal course of business function. Here the “normal course of business function” clause is very important. An auto maker earns revenue by selling the cars it produces, but if the auto maker company earns some money by selling a piece of land, it will come under the “revenue from sale of land” section.

    Expenses are the cash outflow or the money the company spends to develop the products or services and run the business processes and perform other business related activities. The expenses can be of different types as the name suggest

    • Cost of Goods sold: It denotes the direct cost of all the raw materials or inventories needed to develop the end product or services. This direct cost includes inventory cost, labor or human resource cost, energy cost etc. The difference between revenue and Cost of Goods sold is termed as “Gross Profit”.
    • Selling and General Administrative expenses: This includes the indirect costs to sell the developed products and fund the administration to fund the business. The selling expenses can be the salary of sales people, marketing cost, advertising cost, sales stores and transfer cost etc. The administrative costs include salary of directors to run the business, legal and regulatory costs, insurance, office space rents, telephone bills, office materials etc.
    • R&D cost: Research and Development (R&D) cost represents the money spent in research and development. It covers a significant part of total expenses for research oriented businesses like Pharma, High Technology etc.
    • Depreciation and Amortization: Depreciation and amortization are the non-cash expenses which are related to the capitalization of fixed tangible or intangible assets.

    All these expenses incurred during the normal course of business are called the operating expenses. So the difference between revenue and all the operating expenses is called the “Operating Profit”.

    Other important Non-Operating Revenue/Expenses are

    Other revenues: Revenues generated from any other source except from the normal business activities come under this section. An example would be revenue received from the same of any unused land or some fixed assets.

    Foreign Exchange gain/loss: Company can gain or loss money due to foreign exchange rate movement. Multinational Companies normally buy foreign currencies to hedge their foreign currency exchange rate risk. Any movement in the foreign currency exchange rate can lead to gain or loss.

    Finance or Interest Coat: Any finance or interest cost will come under this section. Companies have to pay interest on the loan the y have taken or some bank charges for any finance from the bank.

    Income Tax Cost: Companies have to pay the income tax to the local government and the foreign government of the country in which they are operation based on their profit. This expense comes under non-operating expenses.

    Operating Profit

    Operating Profit is being calculated as the difference between the total Sales Revenue and total Operating expenses which include Cost of Goods Sold, Selling Expenses, Administrative Expenses, R&D Cost, other expenses etc.

    Operating Profit = Sales Revenue – Operating Expenses.

    Higher Operating Profit indicates higher revenue realization with lower operating expenses.

    Profit before Depreciation Interest and Taxes (PBDIT)

    Profit before depreciation interest and taxes (PBDIT) is the main profit or the cash inflow from the business operation without considering the depreciation, Interest and taxes paid. It is calculated from operating profit after adding other incomes if any. If there is no other income from any other sources, PBDIT will be same as operating profit. This is also popularly known as Earnings before interest, taxes, depreciation, and amortization or EBITDA

    Profit before Interest and Taxes (PBIT)

    Profit before Interest and Taxes is calculated from Profit before depreciation interest and taxes or EBITDA after deducting the depreciation or amortization charges if any.

    PBIT or EBIT = EBITDA – Depreciation or Amortization

    Profit before Tax (PBT)

    Profit before Tax is calculated after deducting the interest expenses from the PBIT (Profit before Interest and Taxes). Companies pay interest on its long term loans, short term loans and bond issued to its investors to raise money. Higher interest can erase all the profits earned by the company and zero interest gives the company significant financial advantage.

    Tax

    Tax in the income statement (Profit & Loss Statement) refers to the corporate taxes paid to the government out of its profit. The taxes paid depend on the profit and the applicable corporate tax rates. Here Tax refers to the combination of all type of taxes paid by the company for its business operation. Dividend payout and ESOP are not part of normal business operations, so taxes paid towards the same won’t come under this category.

    Net Profit (PAT)

    Net Profit refers to the net earnings or income from the business operation. It denotes to the final cash the company generates during the whole period. Earnings or Net profit is used to pay dividends or keep as retained earnings for the future.

    Dividend

    Dividend denotes the amount paid out of net profit to all the shareholders of the company. Preference dividend is paid for preference shareholders and it is compulsory to pay the same after every quarter result declaration while normal dividend payment depends solely on the decision of the management.

    Retained Earnings

    Retained Earnings refer to the amount left with the company after paying all the dividends. This amount or cash is carried forward to future periods as reserve cash and increases the total reserve amount specified in the balance sheet. Companies keep retained earnings or cash reserves to improve its own cash position or to invest for expansions in future.

    One sample Income Statement for 12 months is shown below

    Profit and Loss Statement for 12

    Months

    Sales (A)

    15840

    Expenses (B)

    Cost of Goods Sold (C )

    7325

    Selling and Admin Expenses (D)

    3746

    Other Expenses (E )

    334

    Total Expenses (B=C+D+E)

    11405

    Operating Profit

    (F = A-B)

    4435

    Other Income (G)

    125

    PBDIT or EBITDA
    (H= F+G)

    4560

    Depreciation (I)

    360

    Profit before Interest and Taxes (PBIT)

    4200

    Ineterest Paid

    200

    Profit Before Tax (PBT)

    (P=H-I)

    4000

    Tax (T)

    1200

    Net Profit (PAT)

    (Q = P-T)

    2800

    Dividend (Div)

    700

    Retained Earnings

    (R = Q- Div)

    2100

     

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