9.1 Income Statement

Hanumant Dhokle

FINANCIAL STATEMENT ANALYSIS

The income statement is basically the first financial statement you will come across in the annual report of any company. It also contains the numbers most often discussed when a company announces its results - numbers such as revenue, earnings and earnings per share. Basically, the income statement shows how much money the company generated (revenue), how much it spent (expenses) and the difference between the two (profit) over a certain time period. Income statements measure the profitability of that firm over a given period of time, typically on a quarterly or annual basis. The income statement goes by other names too such as profit and loss statement (P&L) and also the statement of earnings. Regardless of what it is called, a whole host of relevant information about a company’s business progress can be found in this financial statement, among them:

Total Sales or Revenues:

The income statement will show the current quarterly and / or annual sales figures for the firm and compare that with prior periods. Revenues are often the first line item listed in an income statement, which is why we refer to sales growth as top line growth.

Cost Of Goods Sold:

This reflects the total costs it took to manufacture and distribute those goods and services that were sold in that period, including labor, raw materials, shipping, insuring, and warehousing.

Indirect Costs:

These expenses include long-term research and development costs, general administrative expenses and other costs such as consulting fees.

Interest Income And Expenses:

Companies may invest the cash they have on hand in an effort to maximize the use of their capital. This is particularly true for financial services’ firms. Income statements not only account for the success a company has had in generating interest income, but simultaneously account for the interest expenses the firm incurs to finance projects or simply to deal with day-to-day matters.

Taxes:

Obviously, companies, like individuals, have to pay their tax expenses. And for companies with locations in multiple cities, states, and countries, this could be a complicated task. The income statement will show a firm’s income before and after taxes.

Net Income:

This is the most common measure of a company’s profitability, since it takes all of the revenues and interest income enjoyed by the firm in a reporting period and subtracts all of the costs required to engineer those sales.

Sample Income Statement: Grasim Industries Ltd.*

When it comes to analyzing fundamentals, the income statement lets investors know how well the company’s business is performing or, basically, whether or not the company is making money. Generally speaking, companies ought to be able to bring in more money than they spend or they don’t stay in business for long. Those companies with low expenses relative to revenue - or high profits relative to revenue - signal strong fundamentals to investors.

PROFIT & LOSS ACCOUNT
  Mar’09 Mar’08 Mar’07
INCOME      
Operating Income 10,877.98 10,241.97 8,643.24
EXPENSES      
Material Consumed 3,632.04 3,268.70 3,000.40
Manufacturing Expenses 2,176.25 1,671.44 1,271.96
Personnel Expenses 605.12 557.67 469.40
Selling Expenses 1,569.50 1,363.53 1,252.64
Administrative Expenses 334.23 296.43 268.40
Expenses Capitalized - - -
Cost Of Sales 8,317.14 7,157.77 6,262.80
Operating Profit 2,560.84 3,084.20 2,380.44
Other Recurring Income 218.80 218.44 161.40
Adjusted PBDIT 2,779.64 3,302.64 2,541.84
Financial Expenses 142.14 107.00 111.84
Depreciation 456.97 353.27 317.91
Other Write-Off s - - -
Adjusted PBT 2,180.53 2,842.37 2,112.09
Tax Charges 599.88 962.33 690.55
Adjusted PAT 1,580.65 1,880.04 1,421.54
Non-Recurring Items 18.95 328.50 93.20
Other Non-Cash Adjustments 48.36 24.06 21.07
Reported Net Profit 1,647.96 2,232.60 1,535.81
Earnings Before Appropriation 2,712.37 3,197.93 2,414.18
Equity Dividend 275.02 275.02 275.10
Preference Dividend - - -
Dividend Tax 41.38 41.42 35.36
Retained Earnings 2,395.97 2,881.49 2,126.72
* All figures in crores.      
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