BAJAJ BROKING
September 30, 2024
5 mins read
The income statement (also known as the profit and loss account) is one of the most important financial disclosures made by listed companies. The income statement provides the revenues, income, expenses, and taxes of a company. It helps us analyse whether a company is able to run its business profitably or not.
All listed companies in India are required to file their income statement at the end of every quarter and at the end of every financial year. If you are an investor, you should thoroughly analyse the income statement of companies before investing in them.
An Income Statement, also known as a profit and loss (P&L) statement, is a financial report summarizing a company’s revenues, expenses, gains, and losses over a specific period. It provides insights into financial performance by detailing how revenue is converted into net income.
To understand what is income statement, it is essential to know that it follows the accrual accounting method, meaning revenues and expenses are recorded when incurred, not necessarily when cash is received or paid. The income statement definition includes both operating and non-operating transactions, offering a complete view of profitability.
The use of income statement is crucial for assessing a company’s financial health, guiding investment decisions, and evaluating profitability. Learning how to read income statement involves analyzing components such as gross profit, operating income, and net earnings to determine financial stability and efficiency.
The most important components of the income statement are explained below:
Understanding the income statement concept is crucial for financial analysis. It provides a clear picture of profitability, helping assess financial health and guiding business decision-making. As a core financial document, it summarizes revenue, expenses, and profitability over a given period.
The income statement is one of the most important financial disclosures made by companies for the reasons explained below:
The ultimate objective of running a business is to earn a profit. It is the income statement that tells us whether a company is able to make a profit or not.
An income statement tells us how well a company is running its business. In other words, how well it is selling its products or services, how well it is managing its expenses and tax liability, and whether it is able to earn a profit for a financial period.
An income statement provides us with a breakup of a company’s revenue in terms of revenue from operations and non-operating income. This helps us analyse to what extent the company’s operational and non-operational income are contributing to its total revenue.
Similarly, an income statement provides us with a breakup of a company’s expenses into operational and non-operational expenses.
By comparing a company’s revenue and expenses provided by its income statement over a period, we can examine whether it is running its business well or not.
The income statement serves as a critical financial document for various stakeholders, offering valuable insights into a company's financial performance. It provides details about revenue, expenses, gains, and losses, helping investors, management, and creditors make informed decisions. Below are the key ways in which an income statement is used.
1. Investors and Shareholders
Investors analyze an income statement to assess a company's profitability and efficiency. By examining revenue trends and cost structures, they determine potential risks and growth opportunities. The income statement meaning becomes evident as it helps them compare financial performance across different companies and industries. Earnings per share (EPS) calculations also aid in evaluating a firm's financial strength.
2. Management Decision-Making
Company executives rely on income statements for strategic planning. By identifying cost-heavy segments and revenue drivers, management can implement cost-cutting measures, optimize pricing strategies, or explore expansion opportunities. The use of income statement extends to monitoring financial health over time, guiding business decisions such as launching new products or shutting down unprofitable operations.
3. Creditors and Lenders
Creditors examine the income statement definition to gauge a company’s ability to meet debt obligations. A strong revenue stream and consistent profitability indicate financial stability, influencing credit approvals and interest rates. Lenders use how to read income statement techniques to assess a company’s financial resilience and its capacity to repay loans.
Understanding what is income statement and its implications helps all stakeholders in financial decision-making, ensuring the business remains competitive and financially sustainable.
Find below an example of the standalone income statement (standalone statement of profit and loss) of Britannia Industries, taken from the company’s Annual Report for FY 2023-24.
| STANDALONE STATEMENT OF PROFIT AND LOSS | ||
|---|---|---|
| (All amounts in Rs. Crores, unless otherwise stated) | ||
| 31-Mar-24 | 31-Mar-23 | |
| I. Revenue from operations | ||
| Sale of goods | 15,938.87 | 15,285.12 |
| Other operating revenues | 247.21 | 333.3 |
| Total Revenue | 16,186.08 | 15,618.42 |
| II. Other income | 210.11 | 220.59 |
| III. Total Income (I+II) | 16,396.19 | 15,839.01 |
| IV. Expenses: | ||
| Cost of materials consumed | 7,394.74 | 7,084.09 |
| Purchases of stock-in-trade | 2,033.36 | 2,453.42 |
| Changes in inventories | 0.01 | -82.13 |
| Employee benefits expense | 565.28 | 520.55 |
| Finance costs | 151.4 | 154.95 |
| Depreciation and amortisation | 271.19 | 195.1 |
| Other expenses | 3,121.87 | 2,900.70 |
| Total expenses | 13,537.85 | 13,226.68 |
| V. Profit before exceptional items and tax (III-IV) | 2,858.34 | 2,612.33 |
| VI. Exceptional items | 2.9 | -227.74 |
| VII. Profit before tax (V-VI) | 2,855.44 | 2,840.07 |
| VIII. Tax expense | ||
| (i) Current tax | 760.7 | 708.5 |
| (ii) Deferred tax | 12.69 | -7.73 |
| Total tax expense | 773.39 | 700.77 |
| IX. Profit for the year (VII-VIII) | 2,082.05 | 2,139.30 |
Here, revenue from operations is arrived at by adding the sale of goods to other operating revenues. The company’s annual report says that other operating revenues are arrived at by adding royalty income to scrap sales.
Then, we have all the expenses listed under the head “Expenses.” It starts with expenses related to the manufacturing of products, like the cost of materials consumed, purchases of stock-in-trade, and change in inventories.
After this, we have expenses incurred on running an office, like employee benefits expense, finance costs, depreciation and amortisation expense.
Then, we arrive at the profit before exceptional items and tax.
After this, we have exceptional items. These are non-recurring in nature and can be either an income or an expense. As per the annual report, exceptional items comprise of voluntary retirement cost and gains on the sale of investments.
Then, we have profit before tax, which is followed by tax expense. Finally, we have profit for the year.
It is not difficult to understand the meaning of the income statement. However, you should analyse it carefully because a poorly analysed statement will provide you with misleading insights. While analysing an income statement, you must read the notes under the financial statements because they provide the break-up of several income and expenses. The notes can also help you understand why certain line items are changing significantly from one year to another.
Disclaimer: Investments in the securities market are subject to market risk, read all related documents carefully before investing. This content is for educational purposes only. Securities quoted are exemplary and not recommendatory.
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A company’s income statement provides us with its revenue, expenses, taxes, and net profit or loss for a financial period. It helps us analyse whether a company is able to run its operations profitably or not.
The main components of an income statement include Revenue from operations, Cost of Goods Sold, Selling, General, & Administrative Expenses, Depreciation & Amortisation, Interest Expense, Income Taxes, and Net Profit or Loss.
You need to understand what each and every line item of an income statement means. For this, you should thoroughly read the notes to financial statements provided in an annual report. You should also check how various income and expenses are changing over the years and what is causing that change.
An income statement provides the revenue, expenses, income, and taxes of a company for a financial period. However, a balance sheet provides us the data about the assets, liabilities, and share capital of a company on a particular date.
As per the regulations in India, listed companies should prepare an income statement at the end of every quarter. Further, such companies must prepare an income statement at the end of every financial year.
Yes, an income statement can help a company in tax planning. By seeing all the expenses for a year, a company can understand which expenses are tax-deductible and which ones are not. If a business has incurred a loss in a financial period, it should check the rules to see if it can carry forward that loss to reduce its tax liability in the next financial period.
At times, people end up using both the accrual and the cash system of accounting to prepare an income statement. Remember that an income statement is prepared based on the accrual system of accounting and not the cash system.
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