The Income Statement
Income statement (also referred to as profit and loss statement (P&L), revenue statement, statement of financial performance, earnings statement, operating statement or statement of operations) is a company's financial statement that indicates how the revenue (money received from the sale of products and services before expenses are taken out, also known as the "top line") is transformed into the net income (the result after all revenues and expenses have been accounted for, also known as Net Profit or the "bottom line"). It displays the revenues recognized for a specific period, and the cost and expenses charged against these revenues, including write-offs (e.g., depreciation and amortization of various assets) and taxes. The purpose of the income statement is to show managers and investors whether the company made or lost money during the period being reported .
A Sample Income Statement
Expenses are listed on a company's income statement.
The important thing to remember about an income statement is that it represents a period of time. This contrasts with the balance sheet, which represents a single moment in time.
Basic Equations
Revenues - Expenses = Net Income
- In business, net income also referred to as the bottom line, net profit, or net earnings is an entity's income minus expenses for an accounting period. It is computed as the residual of all revenues and gains over all expenses and losses for the period. It has also been defined as the net increase in stockholder's equity that results from a company's operations.
Earnings per Share = (Net Income - Preferred Dividends) / Shares of Stock Outstanding
- Earnings per share (EPS) is the amount of earnings per each outstanding share of a company's stock.
Price to Earnings Ratio = Market Value of Stock / Earnings per Share
- In stock trading, the P/E ratio (price-to-earnings ratio) of a share (also called its "P/E," or simply "multiple") is the market price of that share divided by the annual Earnings per Share (EPS). The P/E ratio is a widely used valuation multiple used as a guide to the relative values of companies. A higher P/E ratio means that investors are paying more for each unit of current net income, so the stock is more "expensive" than one with a lower P/E ratio. The P/E ratio can be regarded as being expressed in years. The price is in currency per share, while earnings are in currency per share per year, so the P/E ratio shows the number of years of earnings which would be required to pay back the purchase price, ignoring inflation, earnings growth and the time value of money.
Dividend Yield = (Dividends per Share / Market Value of Stock) x 100
- The dividend yield or the dividend-price ratio of a share is the company's total annual dividend payments divided by its market capitalization, or the dividend per share, divided by the price per share. It is often expressed as a percentage.
- Dividend yield is used to calculate the earnings on investment (shares) considering only the returns in the form of total dividends declared by the company during the year.
Operating Expense Ratio = Operating Expense / Net Sales
- The operating ratio is a financial term defined as a company's operating expenses as a percentage of revenue. This financial ratio is most commonly used for industries that require a large percentage of revenues to maintain operations, such as railroads. In railroading, an operating ratio of 80 or lower is considered desirable.
- The operating ratio can be used to determine the efficiency of a company's management by comparing operating expenses to net sales. It is calculated by dividing the operating expenses by the net sales. The smaller the ratio, the greater the organization's ability to generate profit should revenues decrease. The ratio does not factor in expansion or debt repayment.
Times Interest Earned = Net Income / Annual Interest Expense