# 3.1. The income statement

The income statement is an accounting report that expresses a company’s performance over a specific period (yearly, quarterly, monthly or other), by reflecting the revenues and the costs that the company incurred during its operating and non-operating activities. All this information is aggregated into large categories of gains and costs: the accounts. As a result, the income statement delivers the net income, which is simply the company’s gains minus its costs.

There are two alternative presentations of the income statement:

• Income statement by nature: gains and costs are aggregated into accounts that have similar nature or type.
• Income statement by function: the cost accounts are classified and organized by the role which a type of cost has within the company.

## Income statement by nature

An income statement classified by nature expresses the accounts by their type, such as depreciations, employees’ benefits expenses, utilities and so on. There is no hint about the allocation of the expenses according to their functions within the business.

##### CASFLO’s Income Statement by nature

Lets look deeper into the accounts of the income statement by nature produced by the CASFLO APP. The following table has the list of accounts. You can notice that on the middle column there is the signal of each account: gains are represented with plus and expenses with a minus. Net income and the intermediate calculations are represented with an equal symbol. The rightmost column provides an example

 Account Type Example Net Revenue + 3.425.000,00 Operational grants + 1.000,00 Raw material and consumables – 830.000,00 Operating expenses – 6.650,50 Employees’ benefits – 180.597,30 Other gains + 2.000,00 Other costs – 2.500,00 EBITDA = 2.408.252,20 Depreciation – 418.750,00 EBIT = 1.989.502,20 Interest expenses – 4.291,67 EBT = 1.985.210,53 Corporate tax – 595.563,16 Net income = 1.389.647,37

#### Example case: Golden Days

The Golden Days business case simulation in CASFLOAPP provides the following income statement by nature:

 Values in: USD 2019 2020 2021 2022 2023 Net revenue – 719 250,00 1 433 500,00 1 764 800,00 1 975 500,00 Operational grants 100 000,00 50 000,00 – – – Raw material and consumables – – 49 275,00 60 915,00 68 310,00 Operating expenses 84 000,00 155 328,00 409 521,00 477 480,00 551 578,00 Employees’ beneficts 52 209,93 574 753,54 726 775,04 901 490,31 988 815,65 Other revenues – – – – – Other expenses – – – – – EBITDA –   36 209,93 39 168,45 247 928,95 324 914,68 366 796,35 Depreciations 358,30 7 821,50 8 420,04 12 855,57 8 238,80 EBIT –   36 568,23 31 346,94 239 508,90 312 059,11 358 557,55 Interest costs 400,00 800,00 1 600,00 1 600,00 2 400,00 EBT –   36 968,23 30 546,94 237 908,90 310 459,11 356 157,55 Corporate tax – 9 164,08 71 372,67 93 137,73 106 847,26 Net income –   36 968,23 21 382,86 166 536,23 217 321,38 249 310,28

## Income statement by function

In an income statement by functions, the expenses are combined by their roles in the operational process: cost of goods sold (COGS), general and administration expenses, sales and marketing expenses, research and development (R&D) costs and other functions that may be deemed as relevant to understand the evolution of the company. The income statement by functions allows the calculation of the gross profit and the operating profit.

That means that the employees’ benefits on an income statement by nature are broken down and allocated into the costs functions on the income statement by function. How they will be split depends on whether the employee works in production, sales and marketing, R&D, general and administration or another type of function.

Although in CASFLO APP it does not occur, in some presentations, depreciations may also be allocated to each function: into COGS if it is a machine, into sales and marketing if it is a salesperson’s car, under R&D costs if it is laboratory equipment and under general and administration expenses if it is office equipment used by the administrative department.

Important: the final result, the net income, must be equal on both by nature and function Income Statements.

Most large and medium sized businesses use the function presentation in their reporting, although for tax and official purposes the income statement by nature is also required. It is also common to see differences between countries: the income statement by nature is more used in European countries, whereas in the United States most companies use the income statement by function.

##### CASFLO’s Income Statement by function

CASFLO APP is conceived to be able to easily convert the income statement by nature into an income statement by functions. The section dedicated to the income statement of user manual explains how.

It is common to see that the depreciations are also allocated to the cost areas, we have opted to keep it isolated in CASFLO APP. This hybrid organization of the income statement is becoming more frequent.

 Item Type Example Net revenue + 3.425.000,00 COGS – 863.580,00 Gross Profit = 2.561.420,00 General & Administration – 46.040,00 Sales & Marketing – 52.436,00 Research & Development – 55.191,80 Operating income = 2.407.752,20 Other gains and costs +/- 500,00 EBITDA = 2.408.252,20 Depreciation – 418.750,00 EBIT = 1.989.502,20 Interest expenses – 4.291,67 EBT = 1.985.210,53 Corporate tax – 595.563,16 Net income = 1.389.647,37

Notice how the Net Income is equal between both income statements.

#### Example case: Dutch Fabric Innovations

The DFI business case simulation in CASFLOAPP provides the following income statement by function:

 Values in: EUR 2020 2021 2022 2023 2024 Net revenue – 2 480 875,00 5 404 150,00 10 128 250,00 15 940 000,00 Cost of goods – 2 076 244,73 4 098 239,55 7 546 602,77 11 395 296,27 Gross profit – 404 630,26 1 305 910,45 2 581 647,22 4 544 703,73 General and administration 202 750,32 191 250,32 258 175,20 248 025,20 277 950,07 Sales and marketing 116 761,56 132 554,91 194 582,36 204 875,71 257 403,16 Research and development 143 147,60 88 268,56 56 179,04 56 179,04 56 179,04 Operating income -462 659,49 -7 443,53 796 973,84 2 072 567,27 3 953 171,45 Other gains and costs 400 000,00 150 000,00 – – – EBITDA -62 659,49 142 556,47 796 973,84 2 072 567,27 3 953 171,45 Depreciations 6 061,85 16 490,40 34 216,69 52 488,70 53 789,40 EBIT -68 721,34 126 066,07 762 757,15 2 020 078,57 3 899 382,05 Interest costs 4 000,00 9 900,00 16 510,00 10 150,00 7 390,00 EBT -72 721,34 116 166,07 746 247,15 2 009 928,57 3 891 992,05 Corporate tax – 29 041,51 186 561,78 502 482,14 972 998,01 Net income -72 721,34 87 124,55 559 685,36 1 507 446,43 2 918 994,03

The diagram presents how each item on CASFLO’s income statement by nature connects to the income statement by functions:

Next Section: 3.1.1. Net revenue