All registered public companies must file their accounts at least on a yearly basis with the authorities. The publicly available important accounts are typically:
- The Income Statement or Profit and Loss Account: this shows the revenue and the cost of revenue
- The Balance Sheet: this shows the balance of the asset versus the liability plus the shareholder equity
- The Cash Flow Statement: This shows the amount of cash and cash equivalents flowing through the company.
First, we will explore the income statement.
The Income Statement
The income statement is also known as the profit and loss statement (P&L). This document tells us what made the company profitable or unprofitable for the given time period. It lists the revenue generated, the cost of generating that revenue, and deducts any taxes paid on that revenue.
The amount of money left after expenses and taxes is known as income.
|Income Statement For Company ABCstartup FY 2011 and 2012|
|Cost of Sales||(250,000)||(300,000)|
|Operating Expenses (SG&A)||(50,000)||(70,000)|
|Other Income (Expense)||20,000||30,000|
|Extraordinary Gain (Loss)||–||–|
|Net Profit Before Taxes (Pretax Income)||215,000||655,000|
Net Sales is the total amount of cash or equivalent made from the sale of goods or services.
The cost of sales is the total cost of manufacture, raw materials, equipment, employees, building maintenance, and depreciation.
Gross profit is net sales minus cost of sales. This is what is left over before other expenses and taxes are applied.
Operating expenses, also known as selling, general, and admin expenses.
Operating income is what is left after SG&A is deducted from gross profit.
Interest expense would typically be the cost of borrowing, for example, the loan repayments to a bank.
Net Profit before taxes is the profit before the taxes are applied.
Taxes are the tax payments due on the revenue generated for this period.
Net income is what is left after all the expenses and taxes are deducted.
Special Note: Always keep a watchful eye out for anything market as special items or extraordinary expenses. These are allowed for in the generally accepted accounting principles (GAAP) but only as one-off charges for things like restructuring or closing of business units. E.g., redundancy payments. These may be significant enough to alter the post-tax profit figure from a healthy profit to a minor loss. You should consider these in your valuation of a company.