The income statement is less complicated and easier to understand than the balance sheet. But still, it is the most analyzed part of the quarterly financial statements. It is because it details the company’s profit sources based on its performance in selling products, offering services or in its investments’ income. To explain that, the income statement shows the company’s income out of its sales and the outgoing cash to cover these expenses. Reading the income statement is not limited to deducting the total expenses from the income. In general, the company has more than one source for income and several different kinds of expenses. The company details the different sources for its income and expenses in the income statement and that reflects a clear image of the company’s performance. Here are some of the main points in an income statement:
- Income or sales.
- Gross profit.
- Net profit.
- Operating profit “income from the company's major operations”.
- Gains and losses from other than the major operations.
- Earnings per share.
- Zakat.
The investor can, when he/she understands what these numbers refer to and the relationship between them, determine the company’s strengths and weaknesses. For instance, a troubled company, which is obviously not a good investment, suffers from increasing expenses and decreasing income which leads to a decrease in its total net profit.
Income and Expenses
As an individual gains profit through his/her work or investments’ revenues, the company can also profit from selling its products or services or its investments’ revenues. Some companies have only one source for profits and others have more than one. The income statement shows the company’s sales and incomes. By following the statement, the size of the company’s financial profit could be accurately known. It can also let you know from which of the company’s sources the profit is generating.
Income
It is the company’s total funds which are gained from its major activity that includes selling goods or the services it produces. Income does not cover the operating costs which always makes it higher than gross profit, net profit and operating profits.
Total Profits (or losses)
f any company can find a way to develop and manufacture products and offer services without incurring any expenses, it would be the richest company in the world. Reality, on the other hand, proves that spending money is important to gain more money. To calculate the company’s total profits (or losses), a deduction should be made by deducting its direct expenses from its income.f any company can find a way to develop and manufacture products and offer services without incurring any expenses, it would be the richest company in the world. Reality, on the other hand, proves that spending money is important to gain more money. To calculate the company’s total profits (or losses), a deduction should be made by deducting its direct expenses from its income.
Operating Profit
production expenses are not the only expenses the company has to pay to succeed. After the product is produced, it is supposed to be advertised and sold and this of course brings in other and more expenses. In addition to marketing and advertising expenses, the company is obligated to pay its employees’ salaries, office supplies and its management expenses. The company’s operating profit (or loss) could be reached by deducting all the operating expenses mentioned from the profits’ total.
Net Profit
in addition to operational expenses, the company has to pay other expenses such as the Zakat. When the company deducts these expenses from the operational profit and adds what income it gains, then what is left forms the company’s net profit. One of the clear indicators that the company’s performance is doing well is the increase in the net profit from one quarter to the next.