Reading An Income Statement

Know how to read an income statement, or Statement of Operations. A company's expenses and revenues can tell a lot.

A company's income statement, or Statement of Operations, lists its revenues, expenses, and net income. Usually Statements of Operation appearing in company and financial reports show results over several years. By studying the line items and trends, one can discover much about the company's success (or lack of).

Generally, the Statement of Operations is divided into several sections.

· Net Sales. Net sales is the company's "top line" revenue from its main or core business.

· Cost of Sales. The Cost of Sales tells how much it cost the company to produce or generate the goods or services represented in the net sales figure. This does not include indirect spending (such as Marketing, Sales, or Administrative expenses), only direct costs such as raw materials or acquisition cost of the goods.

· Operating Expenses. This is where general overhead, administrative, sales, marketing, and some other expenses are listed. In general, operating expenses are the costs (expenses) associated with keeping the doors open, generating business, and filling orders.

· Nonoperating Income and Expenses. These are revenues and associated costs related to other than the company's core business. Common line items are interest income and interest expense.

· Taxes. For anyone who has been gainfully employed, this is self-explanatory. Taxes are the amount the government takes away from a company's profit.

· Net Profit (or loss). This is often referred to as the company's bottom line. It is what is left after all of the costs, expenses, and taxes have been subtracted from all of the revenues.

You can get clues to the company's financial and operational health by studying these line items on the three-year Statement of Operations (or income statement). Notice if revenues are increasing or decreasing. The same is true for cost of sales and other expenses as a percent of net sales. An increase in expenses is not always a bad sign. This could mean more Sales and Marketing expenditure behind new product launches or an increase in Research and Development spending. Both could have a positive impact on future profit while having a negative short-term effect.

A study of the Income Statement or Statement of Operations alone will not give you the full financial picture. It will, however, point you in the right direction should you wish to research a company in more detail.

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