OPERATING STATEMENT: KNOW BASIC COMPONENTS

An operating statement, also known as a profit and loss statement or an income statement, is a vital financial statement used by all Firms, Companies, Financial Institutions etc.,

This statement shows a company's revenues and expenses and calculates a company's net profit or net loss for a specified period of time.

In this statement, we come across various components which reflects the financial transaction and position of the firm / company.

So today, we will see common components used in operating statement. 

1. Gross Sales:

Gross sales are total amount of sales reported by the unit in a financial year before allowing any discounts/ allowances/ sale returns etc.

2. Net Sales:

Net sales are defined as Gross Sales (-) Sales allowances/ discounts/ Returns (-) Excise Duty / Service Tax/ GST.

If the difference between Gross sales and net sales is greater than the industry average, it is an indication that the company is giving huge discounts or there may be excessive returns.

Net sales play a significant role in analysis as it gives the exact financial position of a unit during a financial year.

3. Raw material consumed:

This gives the amount of raw material consumed during a financial year.

Formula for raw material consumed = Opening stock of Raw material + Total purchases – Closing stock of raw material.

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Unit may not be consuming entire raw material purchased by it during a financial year. Some part of raw material purchased during a particular financial year may be spilling over to next year, if not put into use in the same year. Hence, in order to arrive at the amount of raw material consumed which can be evidenced by the reported sales during a financial year, raw material consumption is an important factor.

4. Depreciation:

Every tangible asset, which is used in manufacturing/ trading activity has to be depreciated depending upon its useful life. Though, there is no outlay of cash in the form of expenditure, depreciation is calculated and is shown as an expenditure in profit and loss account statement, as it has a bearing on the life of the asset.

Amortization: As depreciation is calculated in respect of tangible assets, amortization is calculated in respect of intangible assets.

Both Depreciation and Amortization are important in analysis of operating statement as these are non cash expenses.

5. Cost of Production: Cost of production refers to the total amount required for producing a particular commodity during a year.

Formula for Cost of Production = Expenses incurred on raw material + Stores and Spares + Power and fuel + Direct labour + Other manufacturing expenses + Depreciation + Opening stocks in process (–) closing stocks in process.

6. Cost of Sales:

Cost of sale is the cost incurred in getting the finished goods into saleable state and it is required to be worked out to know the cost of units actually sold in the reporting period.

Formula for Cost of Sales = Cost of Production + Opening stock of finished goods (–) closing stock of finished goods

7. Operating Profit:

Formula for Operating Profit = Net sales (-) Cost of sales (-) Selling, General and administration expenses

It gives an idea to ascertain the profit making potential of the unit and is useful to compare with similar type of units for their margin generating capacities. Operating Profit is important as it enables the user to understand the amount of profit generated from core operations.

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8. Operating Profit after interest:

Formula for Operating Profit after interest = Sales (-) Cost of sales (-) Selling, General and administration expenses (-) Interest (-) Bank charges

It is to understand whether the unit is generating sufficient operating profit out of its operations to take care of interest and other Banking expenses.

Apart from this, it also denotes the burden that is carried by the unit in the form of interest and charges on account of Bank/ outside borrowings.

9. Non operating income:

Income reported by the unit from its non regular operations has to be classified as non operating income.

Ex: Interest on Unsecured Loans & Loans given to related parties, Income from Investments, Interest on Deposits, Forex gain, Profit on Sale of Fixed Assets, Profit on Sale of Investments, Insurance Claim, Prior period income, Liabilities written back etc.

It is to understand whether the profit reported by the unit is contributed by income emanated out of non core activity or non operating income.

10. Non operating expenditure:

Expenses incurred by the unit on account of activities unrelated to operations.

Example: Goodwill & Other Intangible Assets Written off, Preliminary Expenses Written off, Forex Loss, Loss on Sale of Fixed Assets, Provision for doubtful debt/ receivables, Advances written off, Provision for diminution in investments etc.

It is to understand whether loss, if any that is reported by the unit is on account of non core activity or non operating expenditure.

11. Preliminary Expenditure:

Expenses incurred before incorporation of business are called as ‘Preliminary expenditure’.

12. Preoperative expenditure:

Expenses incurred after incorporation of business, but before commencement of commercial operations are called as ‘Preoperative expenditure’.

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13. Cash Accruals:

Formula for Cash Accruals: PAT + Depreciation + all non cash expenses

This represents the cash profit generated by the unit on accrual basis as depreciation is a non cash expenditure. Higher the level, better is the comfort level for the unit to take care of repayment obligations and also future expansions, if any.

14. EBIDTA:

It is Earning before Interest, Depreciation, Taxation and Amortization. It gives an idea regarding availability of cash with the unit for payment of debt.

The variables used in calculation of EBIDTA could be different for two similar types of units because of variance in debts (affecting interest portion), investment in fixed assets (affecting depreciation) and the level of intangibles (affecting amortization), resulting change in PBT and accordingly tax expenses.

Formula for EBIDTA: PAT + Interest expenses + Deprecation + Income Tax + Amortization.

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