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The income statement is one of the major financial statements that investors look at to analyze an investment. It covers the revenues, expenses, gains & losses of a company over a given period of time.
The income statement is used to calculate the profit of the company after subtracting expenses from its revenues.
- Income statements follow a simple equation: Profits = Revenues – Expenses
- The key components of an income statement include revenue, expenses and net income.
What are the key components of an income statement ?
Income statements follow a simple equation
Profits(Losses) = Revenues – Expenses
So, it starts with revenues the company generated over the specified period, then we subtract all the expenses like cost of goods sold, employees salaries, interest paid to banks and taxes, etc. till we reach the net income, which all businesses aim to maximize.
Revenues are the total value of sales made by a company by selling its products or services. It’s also known as a company’s top line.
It’s as simple as, if a company sells 1,000 cars for EGP 500,000 during a quarter, it will record EGP 500M of revenues for that period.
Expenses are the cost of the company resources. Expenses can be categorized into the following.
- Operating Expenses: Expenses paid for cost of goods or services sold, salaries, and general & administrative expenses.
- Interest Expenses: Debt interest paid for loans.
- Income Taxes: Taxes paid by companies to government agencies.
Other income, also known as non-operational income, is income generated from non-core business activities. Other income could be categorized into:
- Interest Income – Income generated from interest earned from cash in the banks (i.e. Interest generated from unutilized cash)
- Other income – Income generated from non-core business activities (i.e. sale of land or administration building)
How is an Income Statement structured ?
The result of deducing the cost of sales from revenues is called “Gross Profit”. This is a measure of how a company is performing from direct expenses related to the manufacturing or selling a product.
Other costs that include selling & marketing, general & administrative expenses, are then deducted to calculate the “operating income”, also called “EBITDA – Earnings before interest, taxes, depreciation and amortization”.
EBITDA is a widely used ratio by investors that helps them compare the operational performance of different companies.
After deducting depreciation, an accounting method used to quantify a decline in value of an asset, the EBIT is another proxy for a company’s current operating profitability.
Subtracting financing costs, such as loan interests, and adding interest income, such as income from saving certificates, gives you “Earnings before taxes”. Company’s then have to pay taxes before they can report their net income, which any business aims to maximize as the end-goal.