Income statement (p and l) content, structure, meaning examples gas number


The term income is essentially synonymous with a few other terms, such as earnings and profits. Some people also speak less formally of the bottom line, referring to the position of Net income ( Net profit) on the Income statement. Finally, note that bottom line Net income is sometimes called residual profit, or residual income. That is because Net income is all that remains after subtracting all expenses from revenues.

Note also, however, that other Income statement results include "profits," besides the bottom line Net profit. The Income statement also includes Gross profit, Operating profit, and sometimes other profits or "Net gains ." For more on the several profits, see the Exhibit 1 example statement and the section on Profits and Margins below.

Finally, note that some people refer to the Income statement as a Profit and loss statement or P&L. Others call it the Statement of financial performance or Statement of financial operations. Also, even though they are not driven by profit-making objectives, government and non profit organizations still must report and account for incoming funds and outgoing expenses. These organizations, in other words, publish what is essentially an Income statement. However, they governments and non profit organizations usually title it with one of the latter two terms.

When an Income statement first appears, those with a serious interest in company survival and growth generally try first to assess the firm’s recent financial performance in its core line of business. The most direct measure for this purpose is Income statement Operating income (operating profit). Other results from revenues and expenses outside the core business may be large or small, beneficial or detrimental, but it is the normal Operating income that signals the company’s ability to operate profitably in its own line of business.

In this regard, note especially that "bottom line" Net profit sometimes gives a less-than-clear picture of the performance results of most concern to investors and owners. Net profit, after all, can reflect contributions from non cash expenses (such as depreciation), taxes, the firm’s financial investments, extraordinary items, and still other factors. These contributions sometimes "muddy the waters," that is, obscure actual performance results in the core line of business.

As a result, investors and owners sometimes prefer to discuss earnings in terms of operating profit, but also in terms of certain selective income metrics. These metrics also derive from Income statement revenues and expenses, but not all of them. These may include, for instance:

This contrasts with another financial accounting statement, the Balance sheet, which shows the status of assets, liabilities and owner’s equities at one point in time (for example, " At 31 December 2017.") High Level Objective: Net Income and Increasing Owner Value

In principle, profit making companies exist and operate primarily to create value for their owners. The company’s primary way of doing this is by earning income. Once income is declared at period end, there are essentially only two things the firm can do with it:

Retained earnings, in other words, are the funds remaining from Net income after the firm pays dividends to shareholders. Each period’s retained earnings add to the cumulative total from previous periods, creating a new retained earnings balance.

Note incidentally, that firms sometimes declare dividend totals that exceed the firm’s reported Net income. In principle, a firm can sometimes do this without having to reach into its cash reserves or borrow. This is because in reality, they pay dividends from the firm’s net cash inflows for the period, and these can be greater than Net income. This difference, In turn, is possible because Net Income can be reduced by non cash expenses such as depreciation, or bad debt expense. The same non-cash expenses do not reduce the firm’s net cash flows.

Exhibit 2 below is a detailed version of the Exhibit 1 Income statement. This example might represent a manufacturing firm, but the general format and major categories are typical for companies across a wide range of industries. A company that sells services instead of manufacturing goods might report "Cost of services" in place of "Cost of goods sold," but aside from a few such minor differences in terms, statement structure and content are nearly universal. Revenues and Expenses Are Not Cash Flow

Note by the way, that reports of income, revenues, and expenses do not necessarily represent real cash inflows or outflows. This is because regulatory groups, standards boards, and tax authorities, allow or require companies to use conventions such as depreciation expense, cost allocation, and accrual accounting on the Income statement. Direct reports of actual cash flow gains and losses for the period appear on another reporting instrument, the Statement of changes in financial position (or Cash flow statement). Income Statement Items Are Primarily Revenue and Expense Accounts

Those familiar with double entry accounting may also note that most of the Income statement line items are really the names of accounts from the organization’s Chart of Accounts—specifically, the organization’s "Revenue" and "Expense" category accounts. For more on building the Income statement from accounts and account balances, see the article Trial balance. Example Income Statement

Margins are useful for comparing business models and profitability between companies of different sizes. They are also useful for tracking profitability of a single firm across years, as the firm’s business grows. Across long time periods, changes in profit figures simply show that profits are growing, holding steady, or shrinking. Changes in margins, however, show how the firm’s profitability is growing, holding steady, or shrinking. Changes in margins, in other words, show that the firm’s business model is changing. Margins are Performance Indicators

Margins, therefore, are very important indicators of a company’s performance because they measure earnings in terms of the firm’s business model. They are therefore of keen interest to stock market analysts, investors, boards of directors, and the firm’s own management.

However, underneath the firm’s Gross margin (and hidden from competitors and the public), each product has its own Gross margin as well. Only by knowing and managing the mix of individual product Gross margins can management optimize the Gross margin for the overall product set. In other words, individual product Gross margins are essential for managing the product portfolio effectively.