What is a Statement of Operations?

A statement of operations, also commonly known as an income statement or a profit and loss statement, is a financial summary of a company’s revenue and expenses and the resulting net profit or loss over time. The statement is separated into revenue and expenses generated by operating and non-operating activities. It covers a specific time period, usually a quarter or a calendar or fiscal year.

Businesses, particularly public corporations, use a common set of tools to determine the financial position of a company. These tools are standardized to allow the public and investors to have a common point of reference to evaluate the performance of companies against each other and relative to the market as a whole. Public corporations are required by law to use this set of evaluative financial tools and to make the results available to regulators and to the public every fiscal year. A statement of operations is part of this standard financial toolset.

The four financial statements that companies produce to prove their financial condition to the public are a statement of operations, balance sheet, statement of cash flows and a statement of shareholder’s equity. The statement of operations in conjunction with the balance sheet are of particular importance in the review process. Together, they demonstrate the company’s operating performance over time and net worth at a single moment in time.

These financial statements are generated by companies in a format that is governed by a jurisdiction’s commonly accepted accounting practices. In the U.S., for example, the Financial Accounting Standards Board manages the country’s Generally Accepted Accounting Principals (GAAP) that detail the rules and conventions accountants and corporations should follow when producing financial statements. The statement of operations can be misleading if the person reviewing the statement is not familiar with GAAP, the types of revenue and expenses that the statement should cover, and how those items should be characterized.

Since the statement of operations is designed to reflect the totality of operations, it is possible to either include or exclude items in the expense category that should affect net income. The way inventory and depreciation is calculated can affect the profit or loss line in a way that is disproportionate to reality. Certain types of intangible business assets, such as goodwill and brand loyalty, are not included on the statement of operations at all, somewhat limiting its usefulness as a tool to assess the financial condition and value of a company.