Income statement

Also called the Profit&Loss statement, the income statement is one of the 3 most important financial statement used to evaluate a business. It provides information about revenues/gains, expenses/losses of the company, and displays the net profit or loss.

The income statement provides an insight into the company operations. The figures can be displayed for each sector, so that it can be analysed which sectors perform better than others, the possible reasons and therefore act in consequence.

The income statement is a hierarchy of items where the bottom levels consist of G/L accounts representing cost or revenue. This hierarchy usually starts displaying the details of the operating revenue and expenses, and then continues with non-operating gains and losses. Finally, it displays the resulting net income or loss.

In SAP, the hierarchy can be adjusted according to the company or local requirements using a specific FI Statement Version. Furthermore, the net income/loss is a special item called “Profit & Loss results” and it’s calculated automatically.

The following items can be generally found in the income statement:

• Operating Revenue (net sales).

The operating revenue is the revenue that comes from the sales of products or services

• Operating Expenses (OPEX).

Operating expenses are expenses that the company incurrs in its normal or day-to-day business activities. An activity is considered normal depending on the industry of the company. Operating expenses could be:

• Cost of Goods Sold (GOGS).

“Cost of goods sold” or “Cost of sales” represents all direct costs or expenses related to the acquisition/production of goods, or provision of services. It only includes the cost of labour of production, materials and manufacturing overhead.  Other costs, such as distribution of the product or salaries of salespersons are not included.

• Other operating expenses.

These are other expenditures not directly tied to the production of goods or services, such as general or administrative expenses, rents paid, distribution of products, equipment, amortization, other salaries, marketing, research and development,  insurance premiums, utilities, repairs, bank charges, legal advice, etc.

• Gross Profit (calculated).

Gross profit is a calculation used to evaluate how efficient is a company managing its labour and supplies in the production process.

Gross Profit = Operating Revenue from sales or services – GOGS.

• Non-operating revenue.

This a secondary revenue, whose origin is not related to the sales of goods or services. It might come from other sources such as property rental, interest earned in the bank, royalties, etc.

• Gains.

This revenue refers to other non recurring income, such as the sale of an asset.

• Non-operating expenses.

These are expenses not related to the core operations of the company. They represent costs outside of the company day-to-day activites. These expenses are usually placed at the bottom of the income statement. Some examples could be interest charges, losses from currency exchanges, write-downs (on assets), taxes, and one-time or other unusual costs.

• Looses as expenses.

These are unusual expenses, such as the sale of an asset with loss, or expenses in lawsuits.

• Operating income/earnings (calculated).

Operating income is a calculation that represents the income realized from normal business activities.

Operating income = Operating revenue – Operating Expenses .

• Net income/loss (calculated).

The Net income is a calculation that represents the income (or loss) considering operating and non-operating income or expenses.
Net income = (Operating revenue + Non-operating revenue + Gains) – (Operating Expenses + Non-operating expenses + Looses)

In SAP, the income statement shows the figures of the items and accounts from the first period of the fiscal year until a specific period, which is the current by default. There’s also a comparison end period, which is the current period of the previous year by default. However, you can also change it, for instance, to be the previous period of the current year so that you can compare two consecutive periods.

In the next example you’ll see how to run the income statement:

The main purpose of the income statement is to convey details of the profitability of the business activities to the stakeholders. Also, it’s used to compare the results in the different business areas or sectors of the company and get a better insight of where the company performs better.

With the “Gross profit” calculated item, analysts can gain an insight into how well the company is performing in its core business. Analysts can also compare the income statement of different periods to gather which are the trends and make predictions.

The income statement can be used also to compare the company with other competitors using ratios.

3.1.1. Operating ratio

The operating ratio = operating expenses  ∕  operating revenue.

This operating ratio shows the efficiency of the company in keeping the costs low. A smaller ratio means that the company is more efficient gererating revenue.

3.1.2. Operating margin or Return on sales

The operating margin = operating income / operating revenue = (operating revenue – operating expenses) / operating revenue.

This ratio shows the proportion of revenues available to cover non operating expenses.

3.1.3. Earnings per share

The earnings per share = (Net income – dividends paid) / outstanding shares.

This ratio is determinant of the price of a company’s shares. A higher value means that investors will be more attracted to buy shares of the company.

After presenting the income statement, the company management might decide to pay dividends to its shareholders using part of the net income. Once dividends are paid, the amount of money left over will be the retained earnings for the business for the next year. In SAP, the amount is carried over to the retained earnings account by means of the “Balance Carryforward” process.

The following topics have been mentioned in this topic and you should consider going over them:

• Company code.
• G/L account.
• FI Statement version.
• Balance Carryforward.

Related Fiori apps:

• Balance Sheet/Income Statement.
• Maintain FI Statement Verions (like OB58)

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