Have you ever looked at an official financial statement from a publicly traded company you were thinking of investing in? Did it make sense to you? If the answer is no or you can’t remember, keep reading. Continuing on with our FM’s Guide to Accounting series, this week will cover The Income Statement.
I have taken multiple classes in finance, but I am still not an accountant and neither are you. These things can get confusing for a few reasons. First, there is no standardized mold that all organizations use for all of their accounts. This means you’re going to see financial jargon that you won’t necessarily recognize because it won’t fit into a model of the “normal” company’s financial statement you might have seen previously. Second is the fact that you must have context to understand financial statements. Management decisions, the economy, changes in technology, etc., all affect what you see on financial statements. Third, people create these documents and those people are fallible. This is not an exact science. My goal here is for FMs to have a basic, but solid, understanding of what financial statements are, what information you can obtain from them, and why that might be useful to you.
Financial statements can be found in the organization’s annual report. There are three main types that you should be familiar with as a facility manager: the income statement, the balance sheet, and the statement of cash flows.
The Income Statement
Commonly referred to as the P&L (profit and loss report) or earnings statement, the income statement reports an organization’s income, expenses, and profits during the reporting period. This statement shows income when it accrues, meaning when the transaction actually occurs. This is sometimes different than when the cash actually changes hands. The overall basic format for the income statement reports on revenues (sales), subtracts operating expenses from it, and shows the resulting net profit (or net loss if the company didn’t do so well). Keep in mind, the income statement shows the business results for a specific period. The figure to the right shows an example of a generic income statement:
The income statement serves management as a tool to understand the financial state of their organization. It is compared to historical periods to show how well the company did during the same period in a previous month, quarter or year. Sometimes a variance column is included to show the dollar amount or percentage difference between the current period and the historical comparison. Using the above example, the variance of net income between 2017 and 2016 is $4,500 – $4,200 = $300. The percent difference is calculated by taking the percent change divided by the base period for comparison. In this case, that is $300 / $4,200 = 0.0714 = 7.14%.
Income statements are valuable in trend analysis, which we will discuss later in this series. By comparing historical financial data to current period data, management can make decisions about operations based on trends they see.
The income statement is probably the most recognizable financial statement among managers and investors outside of accounting. It is the basis for financial reporting and is one report that you should become familiar with as a facility manager. Join me in the next part of our Intro to Accounting Series as we explore balance sheets.