A first look at income statements: revenue, costs and profits

Today we talk about the income statement, possibly the most discussed financial statement.

The income statement attempts to measure whether the products or services that a company provides are profitable when everything gets added up. In other words, how many sales did a company make during a period of time, how much did it cost to make those sales, and what profit is left over.

The income statement can help answer the following questions about a company’s financial health:

• How much is revenue growing?
• What is the gross profit margin for sales?
• What percentage of revenue results in net profit after all expenses?
• How much does the business repay shareholders versus reinvesting (and what that might mean for how the company sees its future)?

As a quick aside, there’s a fundamental accounting rule called ‘The Matching Principle’ at play in the income statement that is worth mentioning here. Briefly, the matching principle seeks to match the cost with its associated revenue to determine profits in a given time period. This principle will come up throughout the sections about the income statement.

There are always 3 main categories on an income statements:

• Sales or revenue is at the top (fun fact: when fancy people say ‘top-line growth’ they mean sales growth, because sales is always at the top of the income statement)
• Costs and expenses are in the middle
• Profit is at the bottom

Today, we will focus on just identifying how to read these statements.

Parsing the Income Statement

To do that, let’s go back to Bio-Techne and take a look at their annual income statement for 2022 by pulling up the most recent 10-K filing again.

First thing to notice is that it doesn’t say ‘Income Statement.’ Instead, it has this:

It can also be called the ‘profit and loss statement’ or ‘P&L statement’ or ‘operating statement’ or ‘statement of operations’ or ‘statement of earnings’ or ‘earnings statement’ or some combination therein, like we have here for our example. Sometimes it feels like those crafty finance people intentionally obfuscate things. 😉

The other things to notice here are that

• we are looking at the income statement for the Bio-Techne Corporation and Subsidiaries, i.e., the whole company, not one division, and
• numbers are listed in thousands- sometimes this can be millions, so best to pay attention.

So here it is for Bio-Techne. The Income Statement. Remember, sales or revenue is at the top, costs and expenses are in the middle, profit is at the bottom. We’ll take these each separately in the upcoming posts.

A note on footnotes

Before we wrap up today, I want to draw your attention to the ‘See Notes to Consolidated Financial Statements’ at the bottom of the Income Statement.

Finance for Scientists

More in this series

1. Why am I writing about finance?
2. How to learn the financial basics about a new (to you) business
3. Every scientist’s dream: Understanding financial statements
4. A first look at income statements: revenue, costs and profits
5. What scientists need to understand about revenue and its recognition
6. Income Statement Fun: What is included in the Cost of Sales and why you should care
7. How expenses and depreciation can affect the profitability of your scientific work
8. Profitability: the proverbial and literal bottom line
9. Using the Balance Sheet to Understand a Company’s Financial Health
10. Assets: tangible, intangible, and goodwill
11. Decoding Financial Health with Liabilities & Equity from the Balance Sheet
12. Navigating a company’s financial condition with the cash flow statement
13. The Anatomy of a Cash Flow Statement: Operating, Investing, and Financing
14. Budgeting 101: Using our newly acquired financial intelligence to make sense of the budgeting process
15. Making Sense of the Numbers Through Financial Ratios
16. Your Company’s Quarterly Earnings Call: How to Make Sense of It All
17. The “Big Five” Numbers — What Investors Care About and Why
18. Net Present Value: Making the Financial Case for Advancing Scientific Projects You Care About

These footnotes are required per the rules of accounting to explain how the totals were arrived at. Remember that the rules of accounting are meant to be applied consistently, so that one can readily compare trends over time. However, it can be perfectly legitimate to modify the approach, and that modification will be called out in the footnotes. So, every now and again there are very interesting nuggets in the footnotes, however, there are usually quite a lot of them.

Here’s an example footnote about inventory basically explaining that they make more than the sales demand due to ‘economies of scale through a highly controlled manufacturing process.’ Those of you who have worked in regulated manufacturing environments on these types of products will know that manufacturing runs or batch sizes are validated at particular amounts/volumes- you can’t just manufacture to whatever volume you want, and that impacts the financial statements:

That covers the basics. In the next post, we’ll talk about revenue! As always, you can sign up to the mailing list to be updated when the next installment is out.