The Statement of Profit or Loss, commonly known as the Income Statement, is a key financial statement that shows an entity’s financial performance over a specific period.
• Under the Nepal Financial Reporting Standards (NFRS), the Income Statement is prepared to provide information about the revenue, expenses, and profit or loss of an entity, enabling stakeholders to assess its profitability and operational efficiency.
Types:
There are two main formats for presenting the Income Statement:
- Single-Step Income Statement
- Multi-Step Income Statement
Single-Step Income Statement:
This format simplifies the statement by aggregating all revenues and gains at the top, followed by all expenses and losses. The difference between the total revenues and total expenses is the net profit or loss.
Multi-Step Income Statement:
This format provides a more detailed view by separating operating revenues and expenses from non-operating items and categorizing expenses by function (e.g., cost of goods sold, selling expenses, administrative expenses). This format highlights gross profit, operating profit, and net profit, providing more insights into the different components of profitability.
Components of the Profit or Loss Statement:
Revenue:
This includes all income earned from the primary activities of the business, such as sales of goods or services. Under NFRS, revenue is recognized when control of goods or services is transferred to the customer.
Cost of Goods Sold (COGS):
This represents the direct costs attributable to the production of goods sold or services rendered. It includes materials, labor, and overhead costs directly associated with production.
Gross Profit:
Gross Profit is calculated as Revenue minus Cost of Goods Sold. It indicates the efficiency of production and pricing strategies.
Operating Expenses:
These are the expenses incurred in the normal course of business operations, including selling, general, and administrative expenses (SG&A), depreciation, and amortization.
Operating Profit (EBIT):
Operating Profit, or Earnings Before Interest and Taxes (EBIT), is calculated as Gross Profit minus Operating Expenses. It shows the profit generated from core business operations.
Other Income and Expenses:
This includes non-operating items such as interest income, interest expenses, gains or losses from the sale of assets, and other miscellaneous income or expenses not related to core operations.
Profit Before Tax:
This is the total profit before accounting for income tax expenses, calculated as Operating Profit plus Other Income minus Other Expenses.
Income Tax Expense:
This represents the amount of tax expense applicable to the profit earned during the period.
Net Profit or Loss:
Net Profit or Loss is the bottom line of the Income Statement, calculated as Profit Before Tax minus Income Tax Expense. It indicates the overall profitability of the entity after all expenses have been deducted.