Income Statement(P/L)

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Hi, Guys. I hope you’re doing well.

Today, I’d like to discuss the Income Statement, also known as the Profit and Loss Statement (P/L).

✅　Income Statement

A firm’s Income Statement provides its financial performance over a period of time.

An Income Statement, also known as a Profit and Loss Statement, is a financial statement that summarizes a firm’s revenues, expenses, and profits (or losses) over a specific period of time, typically a fiscal year.

On the contrary, the Balance Sheet shows financial position at a single point in time.

By using an analogy, the balance sheet is like a snapshot, while the income statement is like a video.

The following is a sample income statement.

 

 

✅ Revenue, Cost of Goods Sold and Gross Margin

The first section shows the firm’s revenues or sales, while the following section shows the firm’s expenses.

Revenues(or sales) are the gross increases in stockholder’s equity of the firm that result from operating the business.

Gross Profit refers to the sum of a firm’s revenues, minus Cost of Goods Sold(CoGS).

The cost of goods sold represents the amount that the firm paid for the goods it sold during a specific period of time.

 

【 EXAMPLE】
You run an art supply store. During this month, you purchased  100 sets of art supplies set for \500 each. By the end of this month, you had sold all of the art supplies sets for a total of \120,000. For the month, your Cost of Goods Sold is as follows.
Cost of Goods Sold(CoGS) = \500 × 100 ＝\50,000, and the Gloss Profit of your comany is \70,000(=\120,000 ー \50,000).

 

 

✅ Pross and Cons of Gloss Profit 
Gross profit represents the merchandising profit of a firm but it isn’t a measure of the overall profitability because operating expenses are not yet deducted.
However, CEOs or managers closely watch the amount and trend of gross profit.
They compare the current gross profit with amounts reported in past periods and compare the firm’s gross profit rate with that of its competitors as well.

 

✅　Operating Income and Net Income

Conventionally, in the income statement, profits are presented in multiple stages.

The Income Statement separates Operating Expenses from Non-Operating Expenses.

Operating Expenses are the expenses related to the normal operation of the business and sometimes divided into “Selling, general and administrative expenses”(SGA) and depreciation and amortization.

SGA includes rent, insurance premiums, and employees’ salaries.

Non-Operating Expenses are those that are unrelated to the regular operation of the business.

We separate Operating Expenses from Non-Operating Expenses because it helps us calculate Operating Income.

Operating Income  provides a more reliable forecast of the firm’s future income.

 

That’s all for the income statement explanation.

See you later.

 

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