Statement of Operations

Article byVikram Shakti
Edited byAshish Kumar Srivastav
Reviewed byDheeraj Vaidya, CFA, FRM

Statement of Operations Definition

Statement of Operations, also known as an income statement, records a corporation’s income and expenses for a particular period (monthly, quarterly, or annually) in a standard accounting format 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 taxProfit Before TaxProfit before tax (PBT) is a line item in a company's income statement that measures profits earned after accounting for operating expenses like COGS, SG&A, depreciation & amortization, and non-operating expenses. It gives the overall profitability and performance of the company before making payments in corporate taxes.read more or PBT. The cost of goods soldCost Of Goods SoldThe Cost of Goods Sold (COGS) is the cumulative total of direct costs incurred for the goods or services sold, including direct expenses like raw material, direct labour cost and other direct costs. However, it excludes all the indirect expenses incurred by the company. read more 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 taxProfit After TaxProfit After Tax is the revenue left after deducting the business expenses and tax liabilities. This profit is reflected in the Profit & Loss statement of the business.read more) or the Net income. Dividing the number of shares outstanding with this PAT will be the EPS (Earning Per Share)EPS (Earning Per Share)The Full Form of EPS is Earnings Per Share & it defines the profit share of a Company’s every stock. It is determined as the ratio of Net Income to the Total Number of Ordinary Shares issued by the Company. read more

Below are the creation and flow of the income statement.

Statement of operation Example

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Difference Between Statement of Operations and Income Statement

Significance and Importance

  • An individual with accounting knowledge will be shown, explaining the firm’s profitability for a tenure using a statement of operations. As shown in the format above, this statement depicts the company’s revenue, net sales, and income from its core business operationsCore Business OperationsBusiness operations refer to all those activities that the employees undertake within an organizational setup daily to produce goods and services for accomplishing the company's goals like profit generation.read more, excluding all the expenditures incurred during that particular time. It is used to assess the company’s performance as an entity in a particular time frame. It is also referred to as a profit/loss statement for the same reason.
  • An investor will go through the financials and 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 wealth distribution to the shareholders after meeting all of its fixed liabilities (interest, salary, overheads). Thus investors can anticipate higher fund growth with companies having a significant net income. A year and year comparison of the income statement will help investors assess how the company has fared in the past.

Advantages

Disadvantages

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 crucial in judging the company’s profitability and financial health. Analysts will look into income statements along with cash flow and balance sheetsBalance SheetA balance sheet is one of the financial statements of a company that presents the shareholders' equity, liabilities, and assets of the company at a specific point in time. It is based on the accounting equation that states that the sum of the total liabilities and the owner's capital equals the total assets of the company.read more for their research. The report has its disadvantages when reported unethically and will mislead the analyst. Forecasting the company’s financials to anticipate growth is also feasible and easily done with this statement.

A person with accounting skillsAccounting SkillsAccounting Skills are the set of skills required to present business transactions comprising of financial and non-financial in the books of accounts as per prescribed Standards of Accounting (US GAAP, IFRS, Ind AS) and as a part of legal compliance and analysis of business outcome in an optimum way.read more will be able to predict how the company is performing in its core operations by looking into the statement of operations. They can also analyze and fix any leakage from any 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 company’s report card to see how well it has fared in that particular tenure. Companies also use the same Project Company image in front of lenders to raise capital.

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