Financial

Statements:
Income and Cash Flow
Statements

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Income Statement
• Also known as profit and loss (P&L) statements, income statements summarize
all income and expenses over a given period, including the cumulative impact of
revenue, gain, expense, and loss transactions. Income statements are often
shared as quarterly and annual reports, showing financial trends and
comparisons over time.

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Revenue
• Revenues are the amounts from the sale of goods and services in the normal course of
business.
Expenses
• Expenses are the amounts incurred to generate revenue and includes the cost of rendering
services such as operating expenses, interest payments, rent, salaries and wages, taxes etc.
Net Income
• An excess of revenue over the expenses. In other words, after deducting all the expenses and
taxes from the revenue earned during the period, remaining is the net income from the
business operation.

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Cost of goods sold (COGS)
• Any direct cost related to the production of goods that are sold or the cost of inventory you
acquire to sell to consumers. It does not include overhead expenses related to the general
operation of the business, such as rent.
Gross profit
• Net sales minus the cost of goods sold
Marketing, advertising, and promotion expenses
• Expenses related to selling goods and/or services. Marketing, advertising, and promotion
expenses are often grouped together as they are similar in nature and relate to selling.
EBITDA
• Earnings before Interest, Tax, Depreciation, and Amortization

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Depreciation and Amortization
• Amortization and depreciation are non-cash expenses on a company's income
statement. Depreciation represents the cost of capital assets on the balance sheet being used
over time, and amortization is the similar cost of using intangible assets like goodwill over
time.
Operating income (EBIT)
• Earnings of a business through its regular operations; the profit before any non-operating
income, non-operating expenses, interest, or taxes are subtracted from revenues

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 Amount Amount
Item
(Company A) (Company B)

Revenue 1,000,000 1,200,000

COGS 400,000 480,000
Gross Profit 600,000 720,000
Fixed Costs 200,000 250,000
Variable Costs 100,000 120,000
EBITDA 300,000 350,000
Depreciation &
Amortization 50,000 60,000
Tax 75,000 80,000
Net Income 175,000 210,000

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Importance of Income Statements
• Profitability Analysis: The first and most valuable parameter that every investor checks while
investing in any stock is the company’s profitability. In this case, the income statement helps
evaluate whether the company generates profits or incurs losses.
• Tracking Revenue and Expenses: This details the total revenue (including operating and non-
operating revenue) and the expenses incurred to earn that revenue. It can help evaluate the
company’s cost structure, and based on this, changes can be made to improve profitability in the
future.
• Comparative Analysis: The income statement can be compared over different periods to evaluate
the trend in profitability. Also, it can be compared with the competitor companies to assets
relative performance.
• Regulatory Compliance: Under the Companies Act 2013, companies must prepare income
statements, including balance sheets and cash flow statements, at the end of each financial year.

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Cash Flow Statement
• The purpose of a cash flow statement is to provide a detailed picture of what
happened to a business’s cash during a specified duration of time, known as the
accounting period. It demonstrates an organization’s ability to operate in the
short and long term, based on how much cash is flowing into and out of it.
• Cash flow statements are broken into three sections: Cash flow from operating
activities, cash flow from investing activities, and cash flow from financing
activities.

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Cash Flow Statement
• Operating activities detail cash flow that’s generated once the company delivers
its regular goods or services, and includes both revenue and expenses.
• Investing activity is cash flow from purchasing or selling assets—usually in the
form of physical property, such as real estate or vehicles, and non-physical
property, like patents—using free cash, not debt.
• Financing activities detail cash flow from both debt and equity financing.

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Cash Flow from Operating Activities
Direct method is based on the transactional information that impacted cash during the
period. To calculate the operation section using the direct method, take all cash collections
from operating activities, and subtract all of the cash disbursements from the operating
activities.
Indirect method: whereby net profit or loss is duly adjusted for the effects of
(1) transactions of a non-cash nature,
(2) any deferrals or accruals of past/future operating cash receipts, and
(3) items of income or expenses associated with investing or financing cash flows.
This method depends on the accrual accounting method in which the accountant records
revenues and expenses at times other than when cash was paid or received—meaning that
these accrual entries and adjustments cause the cash flow from operating activities to
differ from net income.
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https://ncert.nic.in/ncerts/l/leac206.pdf