Understanding Presentation & Calculation of Revenue Figures in Financial Statements

Revenue is income/ sales/ turnover of a company, generated from its business operations during the year. It’s the topline of the company (also known as Total Income) which drives profit after deducting all the expenses.

Companies earn revenue in return for the supply of goods/ services. It's the only sustainable source for the company to generate cash to fuel the growth & survival of the business

Revenue drives earnings, earnings drive valuations (among other factors). Thus, understanding Revenue figures and its drivers is very important as whole business and valuation analysis is dependent on revenue among a few other factors.

To understand revenue figures, we need to understand?

1) Presentation & Calculation of Revenue Figures in Financial Statements?

2) Various ways of what is Defined as Revenue by a Company?

3) Sources of Revenue Generation & Analytical aspects around Revenue Numbers.?

Revenue figures can be sourced from the consolidated Income statement (for the entire company, its subsidiaries/ associates as a group) or even from standalone Income statement (for the individual parent company). When to use standalone or consolidated figures will be discussed in much detail in the Consolidated Vs Standalone figures thread. But for now, we are going to stick to Consolidated figures only.

Below is a screenshot of the presentation of Revenue figures in the Consolidated Income statement for Hindustan Unilever Limited. Source: HUL AR-21

The presentations can vary across different industries. Across the Banking industry, you would find it presented in a very different format & labels, example below. Banking companies Revenue presentation Source: ICICI Bank AR-21.

1) Revenue from Operations: It's basically income generated from the company's core business operations. We can open the footnote number adjacent to the revenue figure in HUL income statement i.e. footnote no 24.?

This will show a detailed breakup of what the company considers Revenue from Operations i.e. what sums up to the amount of 47,028 Crores. Source: HUL AR-21 (Footnote/ Notes to account for revenue figure).

Within the Company’s reported Revenue from Operations are:

?a) Sale of Products - Clearly related to business Operations,?

b) Sale of services and - Clearly related to business Operations?

c) Other Operating Revenue - Scrap sales, export incentives, etc.?

Let’s dig even deeper to understand how these categories are computed.?

a) Sale of product or?

b) Sale of services is usually calculated as: Revenue from Operations/ Net Revenue= Sales price (Contract price) - Trade discounts/ volume rebates - Sales returns - Taxes/ Duties.

Sales Price/ Contract price - Price at which the good/ service is sold/ rendered respectively Trade discounts- discount offered to retail customers Volume Rebates- discount offered to customers for buying in bulk volumes.?

Cash discount - discount offered to customers, if they pay advance/ full cash payment on invoice date for the entire goods bought/ services availed. Source: HUL AR-21.

Note: Sales returns are a very important data point to track while analyzing Revenues, however for time being, we won't be discussing this as we are yet to take you through analysis of Inventory and COGS.

Under new Accounting standards, it is mandatory for firms to disclose a breakup and computation of Revenue from Contract price. Source: HUL AR-21 (Contracted Price footnote).

In the above screenshot, you will notice that Revenue of Sale of products and services is 46,321 Crores which is the same as sum of Sale of product and sale of services from note number 24. (46269 + 52 = 46,321).

c) Other Operating revenue - Generally below line items are included as part of Other Operating revenue: Export Incentive: Offered by Govt. to encourage industries to export their products/services globally/to a selected region.

2) Claims Received: An official request as part of insurance or other legal claims which company demands for the goods which usually gets damaged.?

3) Sales tax incentives: Same logic as Export incentive.?

3) Interest subsidy: amount that the government is offering to incentivize the borrowers for conducting their operations. For ex: Interest Subsidy for MSME Units (5-7%) in Gujarat: Now, other income: Interest income: interest on investments (for banks its core not other)?

Dividend Income: dividends received on MFs & investments (Exception: for holding co. its core income). Other income also has items like hedging gains & FVTPL invest. That will be covered in a separate thread along with how to adjust reported revenue for accounting changes.

Please find below our summary chart of presentation of revenue items of a company: