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A Guide On Numbers Within The Income Statement (SOCI)
The starting point of analysing the performance of a business more often than not begins with the interpretation of its respective financial statements.
It is a published document entailing the performance of the company over a selected time frame, in accordance to accounting standards that adhere the IFRS, or GAAP.
Financial statements consist of three different sections, the Statement of Comprehensive Income (SOCI), Statement of Financial Position (SOFP), and the Statement of Cash flow (SOCF).
Each component tells you a sub performance of the company, where taken together as a whole, you’ll be able to form a conclusive business judgment on the business performance of the company for that specific time frame.
Referencing the teachings from the Financial Reporting and Analysis module offered by Kaplan under its new university partner, University of Essex, let’s take a look at the first component of the financial statements that is of ultimate concern to shareholders, the SOCI.
The SOCI
The SOCI, collectively takes into consideration of key items like Revenue, Cost of Sales, Gross Profit, Operating Expenses, and of course, your Net Profit, which will in turn determine your Earnings Per Share (EPS).
This is an example of an SOCI which we will be basing this guide on.
Sample Income Statement
As you can see from the attached example, the respective numbers entailing each section’s performances are presented in two columns.
These columns are for two separate time frame, in this case one year ago for the same quarter, to facilitate proper comparison.
Let’s break things down in small clusters for an analysis to be drawn.
Revenue, Cost of Sales, Gross Profit
Revenue represents the total amount of sales in monetary figures collected by the company in exchange for services provided or goods sold by the company.
Cost of sales relate to the cost of producing the goods or services sold by the company.
For a bakery, it will take into consideration of things like purchases of raw materials (flour, eggs), and to a certain extent, depreciation expenses of machineries used to produce the product.
The net difference between Revenue and Cost of Sales will give you the Gross Profit of the company. This number denotes what residual profit is earned by the company after selling a product and netting off the direct costs involved in making it.
The higher the Gross Profit relative to its Revenue (Gross Profit Margin), the better it is, as it will mean that the company has very good reins on controlling costs required to produce its products.
These three figures are directly linked. Low revenue could mean lesser room for higher gross profits and average revenue with high cost of sales could mean lesser gross profits.
After looking at the gross profit, we move on to the second cluster on the SOCI.
Operating Expenses, Other Income
Operating expenses are expenses incurred in the running of your business, which takes into consideration of the staff costs, marketing expenses, and other distribution costs.
In this case (see attached picture above), the operational expenses will relate to Distribution and selling expenses and administrative expenses.
They are costs not directly attributable to producing the product, but are incurred for the operations of the company.
Naturally, if Revenue increases, Cost of Sales and Operating expenses should, theoretically increase as well.
Attention is paid to the operating expenses as well as it will have a direct impact on the net profit of the company, which is essentially the base point in determining whether any dividends might be paid or whether the business is a going concern.
Other income generally relates to gains, which are not derived primarily from the sale of the company’s products or services.
It could include things like a one off gain from the disposal of a property or machinery.
This too, plays a part in determining the final value of the net profit number.
Taxation, Net Profit After Tax
The third cluster in this walkthrough will see taxation paid, before the net profit figure is finalised.
Taxation expenses differ among different countries, and Singapore happens to have one of the lowest corporate tax rates in the world (17-20%).
After deducting taxation expenses, you’ll get your net profit figure, or profit after tax as known by many.
This will be the net profit attributable to shareholders, and depending on the company’s policy, a certain percentage of such earnings will be declared as dividends that will be paid out to its shareholders.
Now go take a financial statement and start applying what you’ve learnt!
This article is brought to you by Kaplan, a leading education provider offering academic and professional courses in Singapore. You can find out more about Kaplan by visiting their site http://www.kaplan.com.sg/. To find out more, please call: 6733 1877 or email Kaplan at info.sg@kaplan.com.
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