1.Profit and loss account or ‘P & L’

2. Income statement

3. Trading and profit & loss account

4. Statement of income/revenues

5. Statement of operations

6. Operating results statement

7. Statement of operating results

8. Statement of earnings

9. Earnings statement

10. P & L statement

11. Statement of financial performance, etc

Does the name matter?

It is not the accountant’s decision to give any name he likes. The statements are given different names depending on the nature of the business a company does. If for example, a company does not have any trading activity or if it is a service-oriented industry, it will not show a trading and profit and loss account as there is no trading activity. A company like Infosys which provides IT services will have an income statement or a profit & loss account, and a company such as Reliance will have a trading and profit & loss account.

Whatever the case, the income statement shows the profit or loss made. In the case of companies that are involved in trading, two types of profits are shown.

· Gross profit and

· Net profit.

The profit made from sales before subtracting running expenses is called Gross profit. Only the purchase cost of goods is deducted from the price of goods that were sold. The gross profit is used to track the actual trading margin in the business. For company, it is important to ensure that the gross profit never drops.

Net profit is the profit made from sales after subtracting the running expenses. If the net profit has dropped, it means that the operating cost of the business has increased.

In those companies that are not involved in trading, ‘Gross profit’ will not be shown in the income statement. Only ‘net profit’ is shown here. Their business does not involve buying and selling, and so there is no ‘gross profit’.

The income statement of any company is prepared to depend on the nature of business and appropriate names are given to match the nature of their business. In a trading company, the income statement shows the ‘gross profit’ and ‘net profit’ separately.

Features of an Income statement

The income statement also has other features. The following points-wise will help one to understand an income statement better.

· The format of the statement can be either vertical or horizontal:

Whether vertical or horizontal, the first item you find would be ‘revenues’ or ‘sales’.

The ‘sales’ figure appears at the top of the statement is called the ‘top line’ of the business. (We hear some analysts talking about an increase or decrease in ‘top line’ of the company).

In a vertical format, every expense is deducted from the revenue or sales figure to finally arrive at the net profit. Net profit is also termed the ‘bottom line’ as it the last item in the income statement.

The horizontal format shows the sales or revenues on the right side and category wise expenses are shown on the left side. The difference between the two sides will be shown as a loss on the right side or profit on the left side.

· To prepare a revenue statement, a period has to be decided to deduct all the expenses and arrive at the net profit for a month, six months, quarter, a year, or maybe even for a week. The revenue statement for every quarter is prepared by companies apart from the annual report.

· Projected statement is also prepared to shows the expected revenues and expenses during the coming years assuming that the present trend would continue. Projections may be prepared for 5 or 10 years into the future depending on their purpose. These estimated statements are prepared to know what profits to expect for the current year if the present trend continues. Simply put, these projections are just estimates.

· Consolidated statements: Companies which has many subsidiary companies (The Tata Group for example) may publish their ‘consolidated financial statements’ to show figures from all their businesses. This will be in addition to separate statements for each individual firm.

· Provisional and audited statements: The companies Act and the Income-tax Act in India mandates that companies must have their financial statements audited by Chartered accountants. Unaudited statements are called ‘provisional financial statements’ while those that are audited are called audited statements. An investor must study audited financial statements. The annual report of the company encloses the audited financial statements which are final, official, and legal. These audited statements are made available to shareholders of the company. The audited statements of all listed companies are available on the website of the stock exchanges and other financial sites.

Conclusion

As an investor in the stock market, one should be familiar with the Income statement. An investor must look into the audited financial statements. Estimates or projections are provisional statements that are prepared with a lot of assumptions for different purposes. One should keep in mind that even an actual financial statement is not totally free from assumptions.