The Income Statement
The income statement provides the net income of a company by taking the revenue and subtracting the costs accrued while making that revenue. This net income is often referred to as the bottom line. As one could assume, a negative bottom line is generally a bad thing. This would mean the company has not made enough to cover the recurring costs it faces. Unless caused by a non-recurring item, this could be an unfortunate trend.
Non-Recurring items are outliers. Unlike the remainder of the income sheet, they’re not expected to happen again. These are items such as repair costs due to natural disasters, tax write-offs, or discontinued operations. Although identifying a non-recurring item isn’t always easy, it’s critical to do so in the evaluation of this statement. If you can identify these items, you can remove them from your analysis of future terms.
Income Statement Variations
There are two ways to report an income statement: a detailed single step, and multi-step form. Both produce the same figure in the end, but it’s important to note there may be variations in formatting between companies. The difference can be denoted in the way in which operations are portrayed. In a multi-step form, expenses are subtracted multiple times throughout the table. Costs, expenses, and interest payments may all be separated to provide data labeled “Gross”, “Operating”, and “Net”. Conversely, with a single-step form, only Net Income is reported as the bottom line.
These profitability dynamics describe the impact of costs of goods and operating expenses before non-operating expenses are described. The math behind them is quite simple.
Gross Profit is the subtraction of the costs of goods sold from revenue.
Operating Income is then gross profit with operating expenses removed.
It’s important to note that the bottom line doesn’t change between the two forms. They convey the interim income differently, but the net stays the same.
Reading the Income Statement
Let’s break down the income sheet. While many investors will simply look at the bottom line and move on, we’ll start from the top and work our way through the document to ensure we don’t miss anything.
In a single-step form:
- Revenue: This is the company’s summation of sales for the year. As a result, this term may be replaced with “Net Sales” from time to time. No costs have been deducted from this number. It’s the value returned to the company from the goods or services they supplied.
- Costs, Expenses and Other: This is where the revenue turns into income. It’s generally acceptable to group these values, and for the investigating party to simply consider them losses.
- Income from Continuing Operations: This is the net value of income generated when subtracting the company’s costs, including taxes, from their revenue. This value is typically listed because there are discontinued operations within the quarter. Such income is then listed under this section.
- Net Income: Finally, we reach the bottom line. Was the company profitable? Is that profit growing, or receding?