Income Statement Singapore
Income Statement shows the profit or loss of a business for a particular period of time (usually one year), which is the difference between revenue and expenses.
The Income Statement is used for various purposes. Shareholders will be able to see the performance of the business for the past year, as compared to industry standard and other competitors. Lenders will be able to use it to assess whether the profit is sustainable and whether the business is viable.
The format of a typical Income Statement:
Cost of Sales B
Gross Profit C = A-B
Expenses (administration & distribution) D
Operating Profit E = C-D
Finance Costs F
Profit Before Tax G = E-F
Profit After Tax I = G–H
The terms in the Income Statement are explained as follows:
- Represents total sales during the period.
- A point to note is that accounting is based on accrual principle and not cash inflow or outflow. Hence, if a sale is made during a period, it is included as revenue in that period although cash has not been received yet. If cash has been received but sale not completed during a particular period, it is not considered revenue for that period.
- Cost of Sales:
- Represents direct costs incurred for producing the goods or services.
- Direct costs usually increase in direct proportion with sales and include cost of inventory purchased, cost of raw material and labor costs involved in production of the goods or services.
- Gross Profit:
- Represents the profit from the sales, after deducting cost of sales.
- Gross profit margin (gross profit/revenue) show the amount of profit generated for every $1 of sales, before taking into account other expenses. A higher gross profit margin allows all other expenses to be covered.
- Expenses (administration and distribution):
- Operating expenses (for example, advertising fees, office rental and shipping charges) that are not directly related to the production of goods or services. As management is able to control these expenses, the trend of these expenses as a percentage of revenue could sometimes be a sign of managerial efficiency.
- Expenses are recorded based on accrual principle as well. Only those expenses incurred for the production of revenue during the period is recorded. Payment of expenses is not part of the consideration for recording of the expenses. There are a lot of exceptions to this general rule though.
- Operating Profit:
- Represents the profit from just the trading activities, before financing costs are taken into account.
- Finance Costs:
- Represents mainly the interest paid on borrowings and interest income on cash balances with the bank. If the company is using expensive debt to finance their operations, the company may be showing a positive operating profit but a negative profit before tax.
- Profit Before Tax:
- Represents the profit after deducting financing costs but before deducting tax expenses.
- Estimated tax payable for that period.
- Tax payable is computed based on tax (and not accounting) rules. Hence, a company may be showing losses before tax and yet still incur tax payable.
- Profit After Tax:
- Represents the net profit of the company, which can be distributed as dividend to shareholders or ploughed back into the company in the form of retained earnings.
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