Top 5 Things to look at in An Income Statement

An income statement also known as a profit and loss statement is the financial statement that shows the income and expenditure of a company in a given period of time. It is one of the three key financial statements that are used for reporting the financial health of a company and the other two are balance sheets and cash flow statements. Based on the analysis of financial reports, business owners can make the best decisions to generate more profit. Banks and other financial institutions like SBI analyze income statements to see whether the business is loan-worthy or not. Investors also look into these statements to take investment decisions in the particular company. Here we are going to discuss the top 5 financial statements things to look at in the report.

Total Revenue/Sales

All the revenue that has come into your business is known as the total revenue of the particular enterprise. It is also known as sales revenue and gross revenue. In the income statement, you can see that there is some amount is used for keeping the business run whether to make products or services. This can be found at the top line of your income statement. Below is the formula for total revenue-

Total Revenue = Quantity sold*Price

Cost of Goods Sold (COGS)

It is also known as the cost of sales and it’s a very important factor to look for in an income statement. When you make your product you have to incur some price that is called the cost of goods sold. If you have a business that deals in services then the cost to provide that service is your cost of goods sold. In manufacturing businesses, it is the price of goods sold plus your labor cost and in the services sector the price of wages and expenditure done by you to provide those services.

Gross Profit

This can be calculated by subtracting the cost of goods sold from the total revenue. Gross profit is the amount which a company makes in a particular financial year however other indirect expenses are still there in this. When a company decides to grow its business, gross profit is the first thing the owner has to improve. There are only two ways to increase gross profit either by increasing the price of goods/services or by decreasing the cost of goods sold.

Gross Profit= Revenue – Cost of goods sold

Interest Expense

This is the amount of money that a company spends towards the loans taken to run its businesses. However, there are some cases when a company receives an interest in the form of a dividend for the money it invests in any other company. This is an important thing to look for in an income statement as there are cases where a company pays too much money towards interest. However, some companies run totally on owners’ funding so it can be seen as a positive sign for that company.

Net Income 

This is the money a company brings into the business for that particular period of time the income statement has prepared. When the total expenses are more than the revenue that means the company is operating its business at loss. However, if a company spends money towards increasing its technological investment or something that may result in a sharp rise in the company’s income down the years then the negative net income is not such a bad thing for that particular company.

Net Income = Total Revue – Total expenses

About Author