Income Statement also known, as Profit & Loss statement is a report of earnings made by the organization against the costs in the financial year. Investors to understand the profitability of the organization often refer the income statement.
Income statement provides insights into the costs involved for earning the posted profit. It also clearly depicts the operating, net and gross profits of the company.
Lets look at some of the elements that make up the Income Statement.
Total Sales, the most important element, tells us the revenue earned by the company. Most large companies display the sales figures by dividing them according to sales of various individual departments or divisions. This helps in judging the profitability of each individual unit and helps in running them as separate profit units.
Cost of Goods sold refers to the cost incurred in production and sale of the finished product. The cost of raw materials, marketing expenses and any other expense till sale of goods is included in Cost of Goods Sold.
Gross Profit is the total revenue arrived by deducting the costs involved in generating that revenue. Gross Profit must be clearly mentioned in the Income statement as it allows us to analyze the margins of profit involved in the revenue earned.
Gross profit is mainly calculated by using the following formula
Total Revenue - Cost of Goods Sold = Gross Profit
Gross Profit is an important aspect from analysis of organizations profitability.
Income Statement throws up different insights and allows multiple perspectives in analysis of business performance.