III. Income Statement

The basic equation is:

"Income" may also refer to non-sales gross income. So, most people prefer to use the word "Profit" or "Loss" (as the case may be). Americans often use the word "Earnings" instead of Profits. 

We can bifurcate the expenses:

2. Revenue – COGS – Other Expenses = Income (Profit)

This is useful because much of COGS usually varies directly with the sales level while much of other expenses usually does not. In trading organizations, COGS may be equal to Purchases (assuming there is no change in stock levels).

3. Gross Profit – Other Expenses = Income (Profit)

This equation therefore gives us a very broad idea of contribution margin, called gross profit.

4. Gross Profit – Other operating Expenses – Non-operating expenses = Income (Profit)

The idea is to separate the expenses which are linked to the business and expenses which have been incurred not for operations but for other reasons (new business prospects, old activities, financing, etc.)

5. Operating Profit – Non-operating Expenses = Income (Profit)

So, this now tells us whether the existing business lines created a profit or a loss.

There are many different ways, therefore, of presenting the same information. The Appendix provides four alternative formats for the same income statement of an entity.

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