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.
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.
