Monday, 15 June 2015

Understanding Financial Statements (Part 1) - Income Statement

In this section, I will be covering on the different parts of the financial statements of a company, highlighting the areas of focus which I think are important and my opinion of them, while other more detailed items in financial statements would be listed under the more general item of "others" in their respective categories. (Feel free to discuss some of them in the comments) This blogpost does not aim to go into the details of financial statements and hopes to be a stripped-down version to be easily understood.

Part 2: Balance Sheet
Part 3: Cash Flow Statement 
Part 4: Financial Ratios

Where does one get the financial statements of the company?

If you own shares in the company, you would get a copy of the annual report sent to you. Alternatively, if you do not own the stock but want to research on it, you can go to the SGX website to get the annual report or to the company's investors relations page, where quarterly reports are usually available as well.

Now, let's begin on the first part of the company's financial statements: The Income Statement

Many pieces of the puzzle in understanding profit 
(image source:


Revenue is the first thing that we would expect to see on a company's Income Statement. This shows the value of the goods or services sold by the company in the reporting period. However, this usually needs to be read with relation to the profit generated by the company as a company which generates lots of sales but loses money on them isn't worth a lot to investors.

Cost of Sales

This appears just below the revenue and refers to the costs directly involved in the production of goods sold by the company. For example, labour costs or purchase of raw materials to produce the end product are included under cost of sales.

Revenue - Cost of Sales = Gross Profit

Other Expenses (Operating and Non-Operating Expenses)

This is the section where indirect expenses are added, such as staff costs, depreciation & amortization charges, research and development costs, mostly expenses which are not reduced even when the business generates less revenue (operating expenses). The other category where these expenses are added is the non-operating expense category, where costs not involved in the main business of a company such as interest on bank loans for a manufacturing firm are added.

Revenue - Cost of Sales - Other Expenses = Profit Before Income Tax

Net Profit Attributable to Owners of the Company

This is Profit Before Income Tax after income tax and minority interests and is the total amount of money made by the company during the reporting period. Divide this by the total number of shares outstanding and you get the earnings per share for the company.

Profit Before Income Tax - Income Tax = Net Profit

Net Profit - Minority Interests = Net Profit Attributable to Owners of the Company


This is the first part of Understanding Financial Statements, hope that it has cleared up some doubts on understanding the Income Statement component of Financial Statements. For the other three parts, the links are as follows:

Part 2: Balance Sheet
Part 3: Cash Flow Statement 
Part 4: Financial Ratios

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