Income Statement

Income Statement

Bijal GANDHI

In this article, Bijal GANDHI (ESSEC Business School, Grande Ecole Program – Master in Management, 2019-2022) explains briefly the structure of an Income Statement.

This reading will help you understand the structure and the main components of the income statement.

Introduction

Income statement is a financial statement that reports the financial performance of an entity over a specified accounting period. The financial performance is measured by summarizing all income and expenses over a given period. Also known as ‘Profit and Loss’ Statement, the Income statement helps the company have a look at the profits for the year and helps it take financial decisions about costs and revenues. The Income statement is also the basis for the tax institution to compute the income tax that the company has to pay every year. The Income statement also allows shareholders to know the dividends that they can receive from the earnings.

Structure of an income statement

Bijal Gandhi

Main components of an income statement

The income statement may slightly vary sometimes depending upon the type of company and its expenses and income, but the general structure and lines may remain the same.

  • Revenue: Also known as top line, revenue or sales revenue refers to the value of the total quantity sold multiplied by the average price of goods or services sold.
  • Cost of goods sold: The cost of goods sold is the sum of all the direct costs associated with a product or service. For example, labor, materials, equipment, machinery, etc.
  • Gross Profit: Gross profit is derived after subtracting the cost of goods from sales/revenue.
  • Indirect Expenses: Indirect expenses include general, selling, and administrative expenses like marketing, advertisement, salary of employees, office, and stationery, rent, etc.
  • Operating Income: Gross profit less indirect expenses are equal to operating income. It is the firm’s profit before non-operating expenses and income, taxes and interest expenses are subtracted from revenues.
  •  Interest Expenses/Income: Interest expense/income is deducted/added from operating income to derive earnings before tax.
  • Tax: The taxes are deducted from pre-tax income to derive the net income. The taxes can be both current and future. The net income then flows to retained earnings on the balance sheet after deducting dividends.

Example: LVMH

The French multinational company LVMH Moët Hennessy Louis Vuitton was founded in 1987. The company headquartered in Paris specializes in luxury goods and stands at a valuation of $329 billion (market capitalization in June 2021). It is a consortium of 75 brands controlled under around 60. Here, you can find a snapshot of LVMH Income statement for three years: 2018, 2019 and 2020.

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Most important components of an income statement include:

  • Total Revenue= Sum of Operating and Non-Operating Revenues for the accounting period. ($ 44,651)
  • COGS: Cost of goods Sold is the total cost of sales of the products actually sold. ($15,871)
  • Gross Margin = Net Sales – Total COGS ($28780)
  • Total Expenses = Sum of Operating and Non-Operating Expenses (Marketing and Selling Expenses + General and administrative expenses + Loss from joint Venture = ($ 16,792 + $ 3641 + $ 42= $ 20475)
  • EBT: Earning before taxes = Net Financial Income (Income – Expenses before Taxes). ( – $ 608)
  • Net Income = (Total Revenues and Gains) – (Total Expenses and Loses) = $ 4702

Income statement and Statement of cash flow

It is important to know that Income Statement does not convey the cash inflow and outflow for the year; The Cash Flow Statement is used for this. For example, credit sale is not recorded in the cash flow statement while cash sale is. Credit sale refers to sale for which the customer will make payment in the future while for cash sales the customer makes the payment at the time of purchase.

Conclusion

Income statement is the source to obtain valuable insights about factors responsible for company’s profitability.

Related posts on the SimTrade blog

   ▶ Bijal GANDHI Earnings per share

   ▶ Bijal GANDHI Revenue

   ▶ Bijal GANDHI Cost of goods sold

About the author

Article written in May 2021 by Bijal GANDHI (ESSEC Business School, Grande Ecole Program – Master in Management, 2019-2022).

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