Operating statement

An operating statement, also known as an income statement or profit and loss statement, is a financial document that summarizes a company’s revenues, expenses, and profits or losses over a specific period. This statement provides insight into a company’s operational efficiency and financial performance.
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Updated on Jun 27, 2024
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3 key takeaways

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  • The operating statement details a company’s financial performance, showing revenues, expenses, and resulting profit or loss over a particular period.
  • It helps stakeholders assess the company’s operational efficiency, profitability, and ability to manage expenses relative to revenues.
  • The statement includes key components such as gross profit, operating expenses, operating income, and net income, which are crucial for financial analysis and decision-making.

What is an operating statement?

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An operating statement is a financial report that outlines the revenue generated and expenses incurred by a business during a specific accounting period. The primary purpose of the operating statement is to provide a clear view of the company’s financial performance and operational efficiency. This statement is essential for managers, investors, creditors, and other stakeholders to understand how well the company is performing and where improvements may be needed.

Key components of an operating statement

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The operating statement typically includes the following key components:

  1. Revenue (Sales): The total income generated from the sale of goods or services before any expenses are deducted.
  2. Cost of Goods Sold (COGS): The direct costs attributable to the production of goods sold by the company, including raw materials and direct labor.
  3. Gross Profit: The difference between total revenue and the cost of goods sold. [ \text{Gross Profit} = \text{Total Revenue} – \text{COGS} ]
  4. Operating Expenses: Expenses incurred during regular business operations, including:
  • Selling, General, and Administrative Expenses (SG&A): Costs related to selling products and managing the business.
  • Research and Development (R&D): Costs associated with developing new products or services.
  • Depreciation and Amortization: The allocation of the cost of tangible and intangible assets over their useful lives.
  1. Operating Income (Operating Profit): The profit generated from core business operations, calculated by subtracting operating expenses from gross profit. [ \text{Operating Income} = \text{Gross Profit} – \text{Operating Expenses} ]
  2. Other Income and Expenses: Non-operating items such as interest income, interest expenses, and gains or losses from investments.
  3. Net Income (Net Profit): The final profit or loss after all expenses, including taxes and non-operating items, have been deducted from total revenue. [ \text{Net Income} = \text{Operating Income} + \text{Other Income and Expenses} – \text{Taxes} ]

Importance of the operating statement

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The operating statement is crucial for several reasons:

  • Performance assessment: It provides a detailed view of a company’s operational efficiency and financial performance, allowing stakeholders to assess how well the company is managing its resources.
  • Decision-making: Managers and investors use the information from the operating statement to make informed decisions about budgeting, investment, and strategic planning.
  • Trend analysis: Comparing operating statements over different periods helps identify trends in revenue, expenses, and profitability, indicating areas of improvement or concern.
  • Financial health: The statement helps determine the financial health of the business by showing whether the company is generating sufficient profits to sustain and grow its operations.

Example of an operating statement

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Here is a simplified example of an operating statement for a hypothetical company for the fiscal year:

DescriptionAmount ($)
Revenue (Sales)1,000,000
Cost of Goods Sold (COGS)600,000
Gross Profit400,000
Operating Expenses
– Selling, General, and Admin (SG&A)150,000
– Research and Development (R&D)50,000
– Depreciation and Amortization30,000
Total Operating Expenses230,000
Operating Income170,000
Other Income and Expenses
– Interest Income5,000
– Interest Expense(10,000)
Net Income Before Taxes165,000
Taxes40,000
Net Income125,000
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If you found the concept of an operating statement interesting, you might also want to explore these related topics:

  • Balance sheet: A financial statement that provides a snapshot of a company’s financial position at a specific point in time, including assets, liabilities, and shareholders’ equity.
  • Cash flow statement: A financial report that shows the inflows and outflows of cash within a company over a period, providing insights into liquidity and cash management.
  • Gross profit margin: A financial metric that shows the percentage of revenue that exceeds the cost of goods sold, indicating production efficiency and pricing strategy.
  • EBITDA: Earnings Before Interest, Taxes, Depreciation, and Amortization, a measure of a company’s operating performance that excludes non-operating expenses.
  • Financial ratio analysis: The process of evaluating financial statements using various ratios to assess a company’s performance, liquidity, profitability, and solvency.

Understanding the operating statement is essential for evaluating a company’s financial performance, making informed business decisions, and assessing overall operational efficiency.


Sources & references

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