What Is a Gross Profit Income Statement?

Gross profit, an important solvency measure, equals revenues minus costs of goods sold. Understanding a company's income statement can help you master the different items that make up a company's profit-and-loss report. These include sales, materials charges, general costs, non-cash items and extraordinary expenses. The statement of income also shows you whether the firm made money over a period of time, such as a month or quarter.

Sales

A company generates revenues by selling merchandise, providing services or both. A sale represents the culmination of a commercial activity. To calculate net sales, accountants deduct customer discounts and rebates from gross sales. Other revenue items include gains on short-term or long-term securities transactions. Securities, or financial products, include stocks, bonds and options.

Costs of Goods Sold

These are expenses that a company incurs through its manufacturing operations or in selling activities. Companies use various methods to appraise materials costs. These include First In First Out and Last In First Out. Besides FIFO and LIFO, businesses also use the average-cost method to value inventories. Costs of goods include materials, labor and allocated overhead, which includes fixed expenses--such as rent and utilities.

Selling, General and Administrative Expenses

SG&A expenses include all charges not related to the production and delivery of a company's products and services. The firm incurs these expenses as a whole. Examples include legal and compliance costs, office supplies and salaries.

Non-Cash Expenses

Non-cash items are expenses for which a business does not pay but enjoys the fiscal benefits. Examples are depreciation and amortization. Depreciation enables a company to spread the costs of fixed assets, such as equipment, over several years. Amortization is the depreciation equivalent for intangible assets, such as patents and copyrights. Even though a company does not pay for depreciation and amortization, these items reduce its operating income and tax liability.

Discontinued Operations

A discontinued operation is a business segment that corporate management has decided to sell but has not yet completed the sale. Accountants record income and costs from discontinued operations separately from operating items.

Extraordinary Items

These are expenses, losses, gains and income from "extraordinary" transactions or events. In accounting terminology, "extraordinary item" means an event that is both unusual in its nature and infrequent in its occurrence. Examples include a snowstorm in Hawaii or an earthquake in a geographical area that has never experienced a seismological event.

Accounting Changes

Financial managers report separately from operating items income and losses related to accounting changes. These modifications include changes in accounting principles or accounting estimates as well as changes in the way a company reports operating data. Accounting principles include U.S. Securities and Exchange Commission directives and international financial reporting standards.

References

• The Ohio State University Fact Sheet: The Profit and Loss Statement -- What Does It Mean?
• University of Glamorgan: Profit and Loss
• Independent Mail: Income Statements Provide Tools for Better Decision-Making
• Bookkeeping Essentials: How To Read The Income Statement
• The Free Dictionary by Farlex: Gross Profit