What is an Earnings Statement? 15+ You Need To Know

A earnings statement gives vital insight into numerous areas of a company. It encompasses a company’s operations, the effectiveness of its management, any potential profit-eroding leaks, and whether or not the company’s performance is comparable to that of its rivals in the industry. Continue reading to learn all you need to know.

What is an Earnings Statement?

The earnings statement is one of the three primary financial statements used to reflect a company’s financial performance during a certain accounting period, together with the balance sheet and the statement of cash flows.

The primary emphasis of the earnings statement, which is also known as the profit and loss statement or the statement of revenue and costs, is the company’s revenues and expenses for a certain period.

What is an Earnings Statement?

 

Understanding the Earnings Statement

The earnings statement is a crucial component of a company’s performance reports that must be reported to the Securities and Exchange Commission (SEC). While a balance sheet offers a snapshot of a company’s financials as of a certain date, an earnings statement reflects earnings for a specific time period and its header specifies the length, such as “For the (fiscal) year/quarter ending September 30, 2018.”

The earnings statement focuses on four essential components: revenue, costs, profits, and losses. It does not discriminate between cash and non-cash revenues (cash vs credit sales) or cash against non-cash payments/disbursements (purchases in cash versus purchases on credit).

It begins with a breakdown of sales, then calculates net earnings and, finally, profits per share (EPS). In essence, it describes how the company’s net revenue is converted into net earnings (profit or loss).

Revenues and Gains

The following are included in the earnings statement, however its structure may vary based on local regulatory requirements, the business’s diverse nature, and the accompanying operational activities:

Operating Revenue

The term “operation revenue” is often used to refer to the money generated by core activities. For a corporation that manufactures a product, or for a wholesaler, distributor, or retailer engaged in the business of selling that product, earnings from main operations refers to money earned from the product’s sale.

Similarly, for a corporation (or its franchisees) engaged in the business of providing services, earnings from main activities refers to the revenue or fees collected as a result of providing such services.

Non-Operating Revenue

Non-operating recurring revenues are often used to refer to revenues generated by secondary, non-core company operations. These revenues are derived from sources other than the purchase and sale of goods and services.

Examples include interest earned on business capital held in the bank, rental earnings from business property, earnings from strategic partnerships such as royalty payment receipts, and earnings from an advertisement display placed on business property.

What is an Earnings Statement?

Gains

Gains, often known as other earnings, are the net amount of money earned through actions such as selling long-term investments. These consist of the net earnings gained through one-time non-business activity, such as the sale of a firm’s outdated transportation van, underused property, or a subsidiary company.

Revenue and receipts are not synonymous. Typically, revenue is recorded in the time in which sales or service delivery occurs. Receipts represent the cash received and are recorded when the cash is actually received.

For instance, a consumer may acquire goods/services from a business on September 28, resulting in the revenue being recorded in September. The consumer may be granted a 30-day payment window due to his positive reputation. It will allow him till October 28 to complete the payment, which is when receipts are recorded.

Expenses and Losses

Expenses are the costs incurred by a company to maintain operations and generate a profit. Some of these costs may be deducted on a tax return provided they comply with IRS regulations.

Primary Activity Expenses

All costs spent to generate the business’s typical operating revenue, which are directly related to the company’s principal activity. They include the cost of goods sold (COGS), selling, general and administrative expenditures (SG&A), depreciation or amortization, and research and development (R&D) costs. The list typically consists of staff salaries, sales commissions, and costs for utilities like as energy and transportation.

Secondary Activity Expenses

All costs associated with non-essential business operations, such as loan interest.

Losses as Expenses

All expenditures associated with the sale of long-term assets at a loss, any one-time or other extraordinary charges, including legal fees.

While main earnings and costs provide insight into the performance of the company’s core business, secondary revenue and expenses reflect the company’s engagement and ability in managing ad-hoc, non-core operations.

Compared to the earnings from the sale of manufactured goods, a significantly high interest earnings from money sitting in the bank suggests that the business may not be maximizing the use of its available cash by expanding its production capacity, or that it faces difficulties expanding its market share in the face of intense competition.

What is an Earnings Statement?

The fact that the company’s factory located beside a highway generates recurring rental money from hosting billboards demonstrates that management is using the company’s existing resources and assets to increase profits.

Earnings Statement Structure

The Net earnings is computed mathematically based on the following:

Net earnings = (Revenue + Gains) – (Expenses + Losses)

To illustrate the aforementioned features using actual statistics, let’s pretend that a hypothetical firm that sells sports equipment and also offers instruction is submitting its earnings statement for the most recent quarter.

It earned $25,800 through the sale of sporting items and $5,000 from the provision of training services. It spent the indicated sums for the provided activities, which totaled $10,650. It earned net earnings of $2,000 from the sale of an old vehicle and losses of $800 from the settlement of a consumer dispute.

The net earnings for the given quarter is $21,350. The above example illustrates the simplest kind of revenue statement that a typical firm might create. It is termed the Single-Step earnings Statement because it is based on a straightforward computation that totals earnings and profits and deducts costs and losses.

However, firms in the real world usually operate on a worldwide scale, have business sectors that provide a variety of goods and services, and engage in mergers, acquisitions, and strategic alliances.

Such a broad variety of operations, costs, and company activities, as well as the necessity to report in a standardized style for regulatory compliance, result in several and intricate accounting entries in the earnings statement.

Listed firms use the Multiple-Step earnings Statement, which separates operational revenues, operating costs, and profits from non-operating revenues, non-operating expenses, and losses, and provides a great deal of additional information via the earnings statement.

Essentially, the various metrics of profitability in a multiple-step earnings statement are provided at four separate operational levels: gross, operating, pre-tax, and after-tax. As we will see in the case that follows, this segmentation assists in detecting how revenue and profitability are shifting from one level to the next.

For example, a high gross profit but a low operational earnings suggest more costs, while a high pre-tax profit and a low post-tax profit indicate a loss in profits due to taxes and other one-time, exceptional charges.

Let’s examine the most recent yearly earnings statements of two significant, publicly-traded global corporations in the Technology (Microsoft) and Retail industries (Walmart).

Uses of Earnings Statements

Despite the fact that the primary aim of an earnings statement is to transmit information about the company’s profitability and commercial operations to its stakeholders, it also gives comparative information about the company’s internals across industries and enterprises.

What is an Earnings Statement?

Such statements are also made more regularly at the department and segment levels in order for firm management to obtain a better understanding of the development of different activities during the year. Such interim reports may remain confidential.

On the basis of earnings statements, management may make choices such as expanding into new areas, boosting sales, increasing manufacturing capacity, enhancing asset utilization or selling assets outright, or discontinuing a department or product line. Competitors may also utilize them to learn about a company’s success factors and key areas of emphasis, such as boosting R&D expenditures.

Since creditors are more concerned with a company’s future cash flows than its previous success, earnings statements may be of little help to creditors. The earnings statement is used by research analysts to compare quarterly and annual performance.

One might deduce if a company’s efforts in decreasing the cost of sales led to an increase in profits over time, or whether the management was able to control operational expenditures without compromising profitability.

Importance of an Earnings statement

A statement of earnings assists company owners in determining if they can produce a profit by growing sales, reducing expenses, or both. In addition, it demonstrates the efficacy of the company’s plans established at the beginning of a financial term.

This document may be consulted by company owners to determine whether or not their tactics were successful. They are able to devise the most profitable solutions based on their study.

A few further details are provided by a statement of earnings.

  1. Frequent reports: While other financial statements are issued yearly, the earnings statement is produced periodically or monthly. Due to this, business owners and investors may carefully monitor the success of the company and make educated choices. This also helps them to identify and address small company issues before they become costly and widespread.

  2. Pinpointing expenses: This statement describes the company’s upcoming spending, any unanticipated expenditures, and any areas that are above or under budget. Expenses consist of rent on the premises, wages, and other administrative expenditures. As a small firm starts to expand, its costs may begin to rocket. These costs may include employing employees, purchasing materials, and advertising.

  1. Overall analysis of the company: This statement provides prospective investors with a summary of the company in which they want to invest. This document may also be analyzed by banks and other financial organizations to see whether the company is loan-worthy.

What is an Earnings Statement?

Who uses an Earnings statement?

Internal and external users are the two primary categories of users for this financial statement. Internal users include firm management and the board of directors, who utilize this information to examine the business’s status and make choices to increase profits.

Additionally, they can address any cash flow difficulties. Investors, creditors, and rivals are examples of external users. In order to choose whether or not to invest in a firm, investors evaluate the company’s growth prospects and profitability in the future.

Creditors evaluate the earnings statement to determine whether a business has sufficient cash flow to pay off existing debts or to get a new loan. Competitors use them to get information about a company’s success factors and areas where the company is investing additional money, such as research and development (R&D) expenditures.

How to read an earnings statement

To comprehend a statement of revenue, let’s examine an example. Here is the revenue statement for the first three months of the current year for a new local football organization.

SINGLE-STEP EARNINGS STATEMENT EXAMPLE

From the above example, it is clear that the organization received $30,000 from the sale of items and $5,000 from training fees. The organization spent a total of $13,450 on different activities. They received $2,000 from the sale of an old vehicle but will incur a loss of $1,000 from the settlement of an upcoming consumer case. Now, let’s plug the data into the following equation to get the net earnings:

Net earnings = (Revenue + Gains) – (Expenses + Losses)

= (35,000 + 2,000) – (13,450 + 1,000) = $22,550

 In one of the simplest forms of earnings statements, net earnings is calculated by plugging the quantities of revenue, cost, gains, and losses into an equation. Since it is based on a simple computation, this kind of earnings statement is known as a single-step earnings statement.

MULTI-STEP EARNINGS STATEMENT EXAMPLE

Depreciation is the technique of spreading out the expense of a long-term asset over its useful life. It is a management agreement to depreciate a company’s assets, but it is not a monetary transaction.

In the actual world, firms that operate on a global scale provide a variety of goods and services and engage in mergers and alliances. Due to these activities, they must keep track of a lengthy number of activities and costs. These businesses must also adhere to particular reporting standards.

Therefore, larger businesses opt for multi-step earnings statements. This approach separates operational revenues, operating costs, and operating profits from non-operating expenses, non-operating revenues, and non-operating gains.

Four degrees of profitability are represented: gross, operational, pre-tax, and post-tax. The next example utilizes the same firm data as the earnings statement with a single step. Depreciation is primarily a measure of the asset value lost by a corporation over time.

Components of an earnings Statement

As costs and profits are depending on the sort of activities or company done, the earnings statement may fluctuate somewhat across firms. However, any earnings statement will often include a number of standard line items.

The most typical revenue statement items include:

Revenue/Sales

Displayed at the very top of the statement, Sales Revenue represents the company’s revenue from sales or services. This value will represent the gross cost of producing the sold items or supplying the services. Multiple revenue sources may contribute to a company’s total revenue line.

Cost of Goods Sold (COGS)

COGS is a line item that aggregates the direct expenses connected with selling things to generate revenue. If the organization is a service provider, this line item may also be referred to as Cost of Sales. Direct costs may consist of labor, components, and materials, as well as a portion of additional expenditures like as depreciation (see an explanation of depreciation below).

Marketing, Advertising, and Promotion Expenses

The majority of companies incur costs connected to the sale of their products and/or services. Marketing, advertising, and promotion expenditures are sometimes lumped together since they are comparable and all connected to selling.

General and Administrative (G&A) Expenses

SG&A Expenses consist of the selling, general, and administrative segment, which includes all indirect expenses connected with operating a corporation.

This consists of salary and wages, rent and office expenditures, insurance, travel expenses, and occasionally depreciation and amortization, in addition to other operational expenses. However, entities may chose to segregate depreciation and amortization into different sections.

EBITDA

EBITDA refers to Earnings before Interest, Tax, Depreciation, and Amortization, which is not included in all earnings statements. It is computed by deducting SG&A expenditures from gross profit (without amortization and depreciation).

Depreciation & Amortization Expense

Depreciation and amortization are non-cash charges that accountants make to spread out the cost of capital assets such as Property, Plant, and Equipment over time (PP&E).

What is an Earnings Statement?

Operating earnings (or EBIT)

Operating earnings is the revenue generated by a business’s normal activities. Profit before non-operating earnings, non-operating costs, interest, and taxes. EBIT, which stands for Earnings Before Interest and Taxes, is a phrase often used in finance.

Interest

Interest Expense. Interest cost and interest earnings are often shown as distinct line items on the earnings statement. This is done in order to reconcile the EBIT and EBT differential. The debt schedule determines the interest cost.

Other Expenses

Typically, businesses incur expenditures that are specific to their sector. Other expenditures may include fulfillment, technology, research and development (R&D), stock-based compensation (SBC), impairment charges, gains/losses on the sale of assets, and foreign currency implications.

EBT (Pre-Tax earnings)

EBT, also known as pre-tax earnings, is calculated by removing interest expenditure from Operating earnings to determine Earnings Before Tax. This is the last subtotal before to calculating net earnings.

Earnings Taxes

earnings Taxes relate to the applicable taxes imposed on taxable earnings. The overall tax burden may include both current and future taxes.

Net earnings

The amount of money earned after subtracting permissible company expenditures is the net profit. It is determined by deducting entire expenditures from total revenues. Gross profit is the amount of money a firm earns after subtracting the cost of items sold from its net revenue.

Gross profit

Gross profit is the difference between a company’s net sales and the total cost of products sold. Net sales is the amount of money you earned from the sale of items, while COGS is the amount of money you spent on the production of those things.

Gains

A gain is the consequence of a favorable occurrence that increases an organization’s revenue. Gains represent the amount of cash gained by a firm through different business actions, such as the sale of an operational section.

Similarly, earnings from one-time non-business activities are accounted for as business gains. As an example, a firm may sell off obsolete cars or underused property. Despite the fact that gain is regarded a supplementary sort of earnings, the two concepts are distinct.

Gain may be recognized for the sale of fixed assets, which is a rare occurrence for a business. Revenue is the money that a business receives on a regular basis.

How to Build an earnings Statement in a Financial Model

After constructing the framework of an earnings statement, it may be included into a financial model to anticipate future performance.

Step 1

First, populate the Excel template for the earnings statement with historical data for any accessible time periods. Input historical data using a certain format to distinguish between hard-coded and computed data. As a reminder, a popular approach of presenting such data is to color hard-coded inputs blue and computed or linked data black.

What is an Earnings Statement?

This allows the user and reader to determine which cells contain formulas and, as such, should not be altered or modified. Regardless of the selected formatting approach, it is essential to use the same format consistently to prevent misunderstanding.

Step 2

Next, assess the historical data’s trend to generate forecasting drivers and assumptions. Analyze, for example, the sales trend to predict sales growth, and the COGS as a % of sales to predict future COGS. Learn about forecasting techniques.

Step 3

Using the supplied drivers and assumptions, anticipate the future values of each earnings statement line item. Use precise line item projections to compute subtotals. Rather of forecasting future gross profit directly, it is preferable to estimate future COGS and revenue and deduct them.

What are Common Drivers for Each earnings Statement Item?

 

Line Item Driver or Assumption
Sales Revenue Selected growth percentage, pegged growth percentage based on index (such as GDP)
Cost of Goods Sold Percentage of sales, Fixed dollar value
SG&A Percentage of sales, fixed amount, trend, fixed dollar value
Depreciation and Amortization Depreciation Schedule
Interest Expense Debt Schedule
earnings Tax Percentage of pre-tax earnings (effective tax rate)

 

While these are regularly used drivers, they are merely suggestions. There are instances in which intuition must be used to decide the appropriate driver or assumption to employ. For instance, a certain entity may generate no earnings.

Consequently, the proportion of sales drivers cannot be used to calculate COGS. Instead, an analyst may need to examine the historical pattern of COGS to derive forecasting assumptions for future COGS.

The same fundamental statements are utilized in both accounting and financial modeling. earnings Statement, Balance Sheet, and Cash Flow Statement. Each of these assertions in a financial model will affect the values of the other statements.

How do you analyze an earnings statement?

An earnings statement can be analyzed in several ways:

1. Bottom line

Examine the company’s net earnings to see whether it generates a profit and how that profit has varied from year to year. Additionally, you may compute and compare the net profit margin for a more accurate comparison. Examine potential causes for fluctuations in your net profit and net profit margin.

What is an Earnings Statement?

Cao replies, “Perhaps you’re generating more money, but your profit margin is smaller.” “Why is this so? The earnings statement permits extensive investigation. Perhaps you have a net loss, but it’s due to a one-time expenditure. It’s not as straightforward as revenue and profit. It also includes everything in between.

2. Vertical analysis

Beginning with cost of goods sold/cost of sales and working your way down, calculate a percentage of revenue for each line item. This enables you to assess the impact of spending on profitability and identify areas for future improvement.

3. Time series analysis

Compare each line item, both in terms of raw dollars and as a percentage of sales, to the corresponding line item from the prior year. This enables you to comprehend why your profitability may have shifted and consider ways to enhance.

4. Notes to the financial statements

Review the notes to the financial accounts in detail. This crucial area of the majority of financial statements created by accountants reveals the assumptions utilized in creating the earnings statement and other information essential to evaluating and analyzing the statistics.

Cao asserts, “The notes are essential to fully comprehending the material.” They mirror the quality of the assertion.

What is the difference between an earnings statement and a profit-and-loss statement?

The earnings statement and a profit-and-loss statement are the same thing.

What is the difference between an earnings statement and a balance sheet?

A balance sheet displays an organization’s assets and liabilities at a certain moment in time. A company’s earnings statement details its profits and expenses over a certain time period.

What is a statement of comprehensive earnings?

Some companies may compile a statement of comprehensive earnings in addition to an earnings statement. This accounts for anticipated earnings and costs. These may consist of unrealized profits or losses from:

  • Financial investments
  • Foreign exchange fluctuations
  • Pension liabilities

Conclusion

A company’s earnings statement provides a wealth of information on the elements that contribute to its profitability. It provides timely updates since it is created much more often than other statements.

The earnings statement displays the company’s expenses, earnings, gains, and losses, which may be used to calculate the net profit or loss for the period. This information enables you to make prompt choices to ensure the financial health of your firm.

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