Everyone who has a business knows that running a business is extremely challenging. Therefore, being diligent with the company’s finances is a prerequisite for anyone looking to achieve profit.
There are several valuable reports for those who need reliable information to make decisions, the three main ones being the Balance Sheet , the Cash Flow Statement and the Income Statement for the Year (DRE).
In this article, we will focus on the latter. And for that, we will explain what the DRE is and how important it is to the business, how it is structured and how to analyze it. Follow!
What is DRE?
The Income Statement (Income Statement for the Year) is an accounting report that provides a summary of the company’s activities – operational and non-operational – in a specific period of time.
Law 11.638 / 2007 establishes the mandatory DRE for all companies, with some specific requirements for publicly traded companies, that is, SA, which need to make the document public.
As a legal requirement, all companies must prepare this report annually, but many opt for a monthly periodicity, precisely because of its great utility.
With it, it is possible to compare what was projected in the budget with what was realized and check if the company had profit or loss in that period. It is therefore very useful to know the financial health of the organization.
This is because it details each item that is composing the company’s net result, showing the revenues, costs and expenses that were calculated. Therefore, its structure must be sequential and logical.
Here is an important piece of information: it must always obey the accrual basis , which is the one in which the registration of the event occurs on the date when it actually happened. Thus, the document is registered on the date of the chargeable event.
This means that he will consider the date of the service, the purchase of the material, the sale of the product, regardless of when it will be paid or received. It is exactly the opposite of the cash flow regime , in which payment or receipt dates are considered.
Thus, we know that everything in the DRE follows the accrual basis, that is, all revenues, costs and expenses must be recorded on the date on which they occurred.
Now let’s understand in more detail how your structure works.
What is the structure of the Income Statement for the Year (DRE)?
As we said above, the report brings the company’s revenues, costs and expenses in a sequential and logical way, which allows an easy reading even for those who do not have deep knowledge of accounting.
The first line of the report, therefore, is sales revenue, that is, all sales revenue in the period covered. Then, taxes and other deductions are subtracted, reaching net revenue.
From this amount, we remove the variable costs related to services, the manufacture of products or the purchase of goods, which gives us the gross margin.
The next deductions are personnel expenses and operating expenses. As a result, we reached EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization, translating from the acronym in English), which is the result generated by the company’s operation, without taking into account non-operating factors, such as financial income and expenses.
From this amount, we subtract depreciation, amortization and depletion and the net value of other income and expenses. With this, we have the company’s operating result, from which we take out the IRPJ (Corporate Income Tax) and CSLL (Social Contribution on Net Income) taxes and, finally, we have the net result.
The structure described above is just an example, as it is a management report. Companies can add or remove lines according to the information that is most important to them.
The important thing is that it starts with gross revenue, that is, with total revenue, and, from there, subtract all costs and expenses (or add other revenues) until you reach the net result, which can be profit or loss.
Each information must be on a line. If it is an entry, it must be preceded by a plus sign and, if it is an exit, a minus sign.
In summary, a company’s Income Statement (DRE) can be structured as follows:
Thus, you can see that the DRE works like a film, showing everything that happened to the company in that period: how much it won and what it lost and how much it lost. That’s why it is so valuable to the company.
Now, let’s see the main insights that this report can bring.
How to analyze the Income Statement (DRE)?
There are basically two readings that we can do with the DRE: the horizontal and the vertical analysis . This nomenclature refers to the report’s own lines.
Thus, in a horizontal analysis you will compare your historical series of DREs, line by line. For example: how is sales revenue now compared to the last report and how has it evolved over time. The same can be done with all other information.
In the vertical analysis, the idea is to understand how a certain information relates to the whole. Thus, you will observe a line and see how it influences the whole or what contributed to it presenting that result, and not another.
The two analyzes are not exclusive, but complementary. Both will provide valuable information to reach a deeper understanding of what happened financially to the company in that period, and from that, it is possible to make some decisions to try to improve the company’s performance.
Conclusion
We saw, therefore, that the income statement is essential to understand what happened to the company from the financial point of view in a given period. It will show all the revenues that the company obtained, how those revenues occurred, and all types of costs and expenses until the final result, which can be profit or loss.
Thus, it is possible to both understand the evolution of each line in time and to know the relationship of each information with the whole.
Did you like the article? Now that you understand what the Income Statement is and how to analyze it, we are sure that this information will help you make the right decisions.
