Breakdown Explanation of Income Statement

Revenue- Where the money comes from. The first line on the income statement is always the total income. This refers to the total amount received by the business during a certain period of time. It is calculated quarterly or annually.

 

Cost of Goods Sold – This includes the total cost you incurred to earn the revenue. For example, if the cost you incurred to get 100 revenue is 40, it is included here. This includes the wholesale value of goods acquired in anticipation of the resale of the business or the total amount spent on the overheads of a business that manufactures goods and the cost of employees incurred in the manufacturing process.

 

Gross Profit - This is what you get when you subtract the total cost from the total revenue. After subtracting $40 from the $100 obtained in the above example, the remaining amount is $60. The gross profit margin is 60%. An increase in the gross profit margin of any business is the most auspicious sign.

 

Operating Expense - This includes research and development cost, selling and administration cost, depression and amortization cost, restructuring and impairment charges, and non-operating, non-recurring expenses incurred during the course of the business. After adding all these expenses we get the total operating expenses of the business.

 

Operating Profits – Operating expense, which is the sum of all the expenses mentioned above, is deducted from gross profit. Then the business will own the amount of operating profit obtained at the end of a certain period.

 

Interest Expenses – This includes the interest paid on the loan taken in relation to a quarter or year of business. As you already know, this aspect is always seen in the income statement of a business because it is necessary to get capital or loan money to expand a business. The more debt the business has, the more interest the business will have to pay. The less debt a business has, the less likely it is to go bankrupt.

 

Gain and Losses Assets - The business includes the amount received from the sale of an asset it owns (other than inventory). If we analyze this further, if a building acquired for $1,000,000 is estimated at $500,000 at the end of depreciation, but if it can be sold for $800,000, the additional $300,000 is stated as the profit from the sale of business assets. Similarly, if an asset estimated at $200,000 was sold at the end of depreciation for $100,000, the remaining ($100,000) is stated as a loss on the sale of the business's assets.

 

Income Before Taxes - You can see the income before taxes section in an income statement after making adjustments to the interest expenses and the profit and loss from the sale of handicrafts to the operating profit received above.

 

Income Taxes Paid - The interest payable on the profits earned by the business may or may not vary depending on the country in which the business is conducted, and the field of business in which the business is engaged. For example, generally speaking, a government charges a higher tax from a business engaged in the alcohol & tobacco sector, while a business producing consumer goods charges a comparatively lower amount of tax. But this is not always the case. Therefore, it is more appropriate to have an understanding of the corporate tax rate of the businesses you are going to invest in.

 

Net Earnings - At the end of the income statement, we can see the gross profit earned by the business at the end of a certain period. The board of directors decides how much of this gross profit is distributed to the shareholders of the business and how much is reinvested by the business. As an investor, you have to study the income statement completely to get a good understanding of the costs incurred by the business to get this gross profit. 

I hope these brief explanations of mine have helped you to do your analysis more successfully.