Statement of Operations Definition
Statement of Operations, also known as income statement, records the income and the expenses of a corporation for a particular period (monthly, quarterly or annually) in a standard accounting format as per the accounting policies advised by the governing body.
Example of Statement of Operations
Consider a company with net sales of 5 million. The expenses (COGS and Operating expenses) for the company are removed from net sales to arrive at a profit before tax or PBT. The cost of goods sold as per reports is 2.8 Million. Operating overheads or fixed overheads are 1 Million. Once PBT is calculated, deducting tax will fetch us PAT (Profit after tax) or the Net income. Dividing the number of shares outstanding with this PAT will be the EPS (Earning Per Share)
Below are the creation and flow of income statement.
Difference Between Statement of Operations and Income Statement
- The main difference between income statement and statement of operations is the semantics. The format of reporting differs from each, but the end line in both the cases same. Both report to the net income or profitability of the company from its core business operations.
- While accounting the particulars into the income statements, accountants consider expenses and revenue for that particular period. However, in some of the cases, all the particulars (expenses, net sales) need not be realized in the same period. In such a scenario, the parameters are adjusted in the next release of the income statement. In other words, revenue might be captured even at the time when the invoices for sale is prepared. Any amount still under process are adjusted thoroughly in the accounting system.
Significance and Importance
- It is used to assess the performance of the company as an entity in a particular time frame. It is also referred to as a profit/loss statement for the same reason. An individual with accounting knowledge will be shown, and it will explain the firm’s profitability for a tenure using a statement of operations. As shown in the format above, this statement depicts the revenue, net sales, and income of the company from its core business operations, excluding all the expenditures incurred in that particular time.
- An investor will go through the financials, statements of operations to be specific before investing in any stock. The information available in the income statement cannot be exaggerated and will give the accurate financial health of the company. Higher net income results in higher wealth distribution to the shareholders after meeting all of its fixed liabilities (interest, salary, overheads). Thus investors can anticipate higher growth of funds with companies having a significant net income. Year on year comparison of the income statement will help investors assess how the company has fared in the past.
Advantages
- It records the financial performance of the company for that period.
- Facilitates the investor in doing his analysis on the stock and take a call whether to buy/sell or hold the stock.
- Analysts can use the statement to see the historical performance and also forecast the performance for the future.
- It acts as a report card of the company’s financial health.
- From the company’s perspective, the income statement makes the tax filing simple and easy to track.
- It points out and highlights the performing and non-performing areas of the business line.
- It also measures the health of the specific department. One can investigate how a particular area is performing against the budget individually.
- These statements are very handy to compare performance with peers (Competitors) and act accordingly.
- It provides a summary of cash flows for the company and is effective in analyzing the inflow and outflow of funds.
- To raise capital from lenders and investors, a statement of operations is very effective in terms of presenting the position of the company.
- It also predicts the interest-paying capacity of the company to meet its liabilities.
Disadvantages
- Income statement doesn’t record expense or revenue when realized but for that particular period. So it will record the amount even before the actual cash has flown into the company.
- The particulars represented in income statements don’t solely explain all the factors resulting in the success or failure of a project.
- The statement has to be recorded periodically and frequently, which is a haphazard task from a company’s perspective.
- Income statement entries are based on assumptions and not facts all the time, which can be misleading in many ways.
- Preparation and reporting are time-consuming.
- The advantage of having a competitive advantage is an oxymoron, which will swing both ways.
- Companies reporting income statements may not provide useful information, and it will mislead the analysts who are researching on the company’s health.
- Non-revenue factors such as external factors, market feasibility are not covered under this statement and will never enter the financial statements. These factors might be the actual reason for the success or failure of a project.
Conclusion
Thus it can be concluded that the income statement of the statement of operation, which will differ from each by just the semantics, is an important and crucial statement in judging the company’s profitability and financial health. Analysts will look into income statements along with cash flow and balance sheet for their research. The report has its disadvantages when reported unethically and will mislead the analyst. The forecasting of the company’s financials to anticipate growth is also feasible and easily done with this statement.
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A person with accounting skills will be able to predict how the company is performing in terms of its core operations by looking into the statement of operations. They can also analyze and fix any leakage happening from any one particular business area by examining the income statement. Year on year comparison will help analyze the growth. In a nutshell, the statement of operations acts as the report card of the company to see how well it has fared in that particular tenure. Companies also use the same to Project Company’s image in front of lenders to raise capital.
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