9 major categories of income statement to evaluate the company’s performance

An income statement reflects profits generated (or losses incurred) over a specified period of time, typically a month, quarter, or year. It states the company’s financial conditions and one can evaluate the company’s present performance by study an income statement. The income statement shows the revenue (sales) that the company has made, the expenses that have been incurred to make those sales, and the profit or loss derived therefrom. The income statement shows what has happened over a period of time. It should always say “Income Statement from (date) to (date).” This statement is also called the Profit and Loss Statement or the P&L To make it simple, we categorise an income statement into 9 major categories to understand the company’s financial position

Let’s discuss 9 major categories in detail

1. Revenue – It is the total sales or gross income of the company. Company’s strength is visible if year on year company can increase its revenue.

2. Cost of goods sold– These are direct costs that a company must spend to produce goods or create services. In short, it is the cost of raw material used to produce the finished product. For eg:- If a company is in business to manufacture and sell a car. Suppose $10,000 is the cost of raw material( Cost of Goods Sold) and if the car sells at $20,000 then revenue is $20,000, we can simply find the gross profit by subtracting  Revenue from Cost of good sold which comes as $15000 and equal to 27% gross profit margin.

3. Operating expenses – These expenses incurred to perform the business operation to produce products or services. It is not a direct expense but plays an important part to generate a company’s revenue. Operating expenses can be defines commonly in:
a) Selling, General, and Administrative (SG&A)–  Employee Salary, rent, legal expense etc come under this category which is connected to support staff.
b) Advertising and Marketing- It is related to advertising or marketing expenses such as print advertising and advertisement
c) Research and Development (R&D). As the name suggests, it is related to the development of the company’s new product or services to sell to customers

4. Other Income – Companies can also generate income other than their core business which comes under the section of other income and recorded on the income statement as a taxable income. However, it is not considered revenue. For instance, the company sell a land

5. Depreciation and Amortisation – Depreciation refers to the reduction in the cost of tangible fixed assets such as plant, equipment, machinery and   Amortization refers to the reduction in the cost of the intangible assets over its lifespan such as patents, trademarks, lease rental agreements, concession rights, brand value, etc.

6. Interest – The companies have to pay interest on the money to borrow to fund their operations or expansion.

7. Taxes – Every country has tax structure for corporate and it applies to the income generated by the selling goods or service. For eg: GST
8. Non-recurring and extraordinary itemsA non-recurring item is a one-time expense that registers on a company’s financial statements which are unlikely to happen again. Due to its unpredictable nature, it doesn’t come under a part of a firm’s normal, day-to-day operations. Extraordinary items are related to gains or losses that happened unusually.

9. Distributions – Distributions is well known by its second name “Dividends”. It is a portion of a company’s profit to share with its shareholders. 

By digging deep into the income statement, an investor can find the company’s potential to grow well in future or not.

2 thoughts on “9 major categories of income statement to evaluate the company’s performance

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