Statement of operations

Statement of operations

Company’s overall performance is usually assessed by three financial statement. Balance sheet, cash flow statement are the first two and the last one is known as statement of operations. This is also known as income statement, profit-loss statement or statement of income. The statement of operations is to report the income of the corporation for that particular period. It records the income and expenses due to operations in a standard format accepted broadly. The format is common for all companies from all industries.

The standard format and flow of statement of operations is as below. For the organization ABC and for the period, the income statement looks as below. The reporting period income statement can be quarterly, monthly or yearly as in case of other financial statements.

How to create statement of operations?

Consider a company with net sales of 5 million. The expenses (COGS and Operating expense) for the company are removed from net sales to arrive at profit before tax or PBT. The cost of goods sold as per reports are 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 number of shares outstanding with this PAT will be the EPS (Earning Per Share)

The below is the creation and flow of income statement.

ABC’s Income statement for 2018-19

 

Net sales 5000000

COGS 2800000

 

Gross profit 2200000

Operating expenses 1000000

Interest expense 600000

PBT 600000

Income Tax 30000

 

Net income 570000

  No of outstanding shares 100000

EPS 5.7  

Significance and importance of statement of operations

It is used to assess the performance of the company as an entity in a particular time frame. It is also referred to as profit/loss statement for the same reason. An individual with accounting knowledge will be show and explain the firm’s profitability for a tenure using 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, statement of operations to be specific before investing in any stock. The information available in 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 its fixed liabilities (interest, salary, overheads). Thus investor can anticipate higher growth of funds with companies having significant net income. Year on year comparison of income statement will help investor assess, how the company has fared in the past.

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. In some of the cases all the particulars (expenses, net sales) need not be realised in the same period. In such a scenario, the parameters are adjusted in the next release of income statement. In other words, a revenue might be captured even at the time when the invoices for sale is prepared. Any amount still under process are adjusted thoroughly in accounting system.

Advantages of income statement.

The SEC (Securities Exchange Commission) of US makes it mandate for all the listed public companies to release the financial statements (statement of operations, cash flow and the balance sheet) in a timely manner. Private companies will have to record these statements as mandate from their stake holders and private equity holders. Each statement has its own benefits, let list down the advantages of statement of operations.

• 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 statement to see the historical performance and also forecast the performance for the future.

• It acts as a report card of company’s financial health.

• From 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 business line. 

• It also measures the health of the specific department, one can investigate on how a particular area is performing against the budget individually.

• These statements are very handy to compare performance with the peers (Competitors) and act accordingly.

• It provides the summary of cash flows for the company and is effective to analyse inflow and outflow of funds.

• To raise capital from lenders and from investors, 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 of statement of operations.

• Income statement doesn’t record expense or revenue when realised but for that particular period. So it will record amount even before the actual cash has flown in to company.

• The particulars represented in income statement doesn’t solely explain all the factors resulting in success or failure of a project.

• The statement has to be recorded periodically and frequently, which is a haphazard task from 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 is time consuming.

• The advantage of having competitive advantage is an oxymoron which will swing both ways.

• Companies reporting income statement may not provide the 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 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 the important and crucial statement in judging 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 own disadvantages when reported unethically and will mislead the analyst. The forecasting of company’s financials to anticipate growth is also feasible and easily done with statement of operations. Person will 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 analyse and fix any leakage happening from any one particular business area by examining the income statement. Year on year comparison will help analyse 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.