How to construct your income statement

Written by N Sivasankaran | Updated: May 31 2013, 09:13am hrs
Many a time we come across the audited and unaudited income statements of companies and while looking at these income statements, we come across jargons like sales revenue, operating expenses etc. So, can we prepare a personal income statement for an individual

The purpose behind the preparation of personal income statement for Nipun Sharad, a management trainee, is to reveal to him about the result of his monetary operations in a particular operating period. Let us look at his hypothetical income statement (see graphic).

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We have not considered the other income into the calculations. If he earns revenue through interest or dividend on investments and rental from properties and gain on sale of fixed assets, then we can show a separate line item in his income statement as net other income.

Top Line: Gross salary is the top most item in the income statement. Hence it can be called as the top line. Higher the top line figure better is the performance of the individual.

Operating Expenses: These are expenses incurred by Nipun in his day to day living. This includes the expenses incurred by his parents and sister as they are dependent family members of him. Lower the operating expenses, better the financial performance of an individual.

Operating Profit: This is the excess of operating revenue over his operating expenses. Higher the operating income (or Profit) better is the profitability of an individual. Operating profit margin for Nipun can be computed by dividing operating income by the operating revenue.

Financial Expenses: The financial expenses such as interest on borrowings incurred by him. Lower the figure better is the performance of the individual. We can compute the interest coverage ratio for him by dividing his operating income by the interest expenses and that comes to 2.29 times. Higher the interest coverage ratio higher is the confidence for the lender to lend money to the individual.

Tax Expenses: The amount tax expenses is an item to be watched by an individual as it can be reduced by availing the tax deductions permitted by the IT provisions fully. The point to be noted here is that every one rupee saved in tax expense increase the profitability of the individual.

Bottom Line: Net profit is the last item in the income statement and hence it is called as the bottom line. Higher the bottom line figure better is the profitability of the individual. Net profit margin can be calculated by dividing the net profit by the total revenue [sum of operating revenue and net other income] and for him it is 5.56% i.e [1/18]*100. Though Nipun is quite impressive in terms of his operating margin (44%) his net income margin is very low (5.5%). This is due to his higher financial and income tax expenses.

The writer teaches accounting & finance courses at IIM Ranchi