What is the income statement? Definition and example

What is the statement of income (profit and loss)?

The income statement details the income and expenses of a business to demonstrate profitability for a period. For publicly traded companies, the income statement is one of three statements that make up the financial statement filed with the Securities and Exchange Commission on a quarterly and annual basis. The income statement is also called the income statement.

The other two statements are the balance sheet, which shows a company’s assets and liabilities, and the cash flow statement, which shows how a company’s cash is managed and used. Some companies also publish a fourth statement called shareholders’ equity, which shows debt and equity attributable to shareholders. Equity is generally shown on the balance sheet. In short, the income statement is a snapshot of a company’s ability to generate profit after expenses have been subtracted from revenue.

What are the components of the income statement?

Here are the main sections usually included in a company’s income statement. Some companies use different names for certain components.

Income

Revenue is the beginning of the income statement. This is the first item that shows the money generated from the sale of goods and services.

Cost of Goods Sold

Cost of goods sold represents the direct cost of purchasing raw materials and producing a finished product.

Gross margin

Gross margin, or gross profit, is a subtotal of profit that shows the revenue generated from sales after deducting the cost of goods sold.

Functionnary costs

Operating expenses are indirect costs, which include expenses for research and development, marketing, and executive salaries.

Operating result

Operating profit is a subtotal of profit after deducting operating expenses from gross profit.

Interest charges

Interest expense relates to the cost of financing, such as interest payments on loans and bonds.

Tax payments

Tax payments refer to corporation tax paid to the government.

Net revenue

Net income is the end of the income statement. This is the bottom line figure that shows how much money is left after expenses have been deducted from income. All expenses are subtracted from income to calculate net income, and the net income formula below lists expenses after income. A company would also break down net income into earnings per share and report the number of common shares outstanding used in this calculation.

Net income formula

Net Income = Revenue – Cost of Goods Sold – Operating Expenses – Interest Costs – Tax Payments

TheStreet Dictionary Terms

Who uses the income statement?

The income statement is a snapshot for business managers, investors, and analysts to assess a company’s ability to generate profits over a period. Collecting revenue data over multiple periods could show whether a business was able to sell more goods and control production and labor costs.

How to interpret the income statement

Revenues and expenses are the main parts of the income statement, and interpreting them helps senior management, investors, and analysts understand how costs are managed to generate profit over a period or set of periods.

In the example below for Apple, a 5-year compilation of its income statement shows how its net profit nearly doubled with increased sales of its products and services while controlling expenses.

Apple lists its revenue as net sales, broken down by products (iPhone, MacBook, etc.) and services (Apps, Apple TV+, etc.). Apple saw a 33% increase in sales in 2021 over the previous year, but the company kept its cost of sales below net sales, which helped it post a healthy gross margin.

The rate of operating expenses remained stable from 2018 to 2021, a sign that the general management kept control of these indirect costs. No extraordinary items were recorded in 2021, so the rest of the expenses were straightforward, resulting in an outsized net profit gain.

Frequently Asked Questions (FAQ)

Here are the answers to some of the most frequently asked questions by investors about the income statement.

What does the income statement show?

The income statement shows the profitability of a business by listing its income and expenses. Its management team can determine, based on the data, whether to cut expenses in a particular area, such as operating expenses or cost of goods sold. If interest charges rise, executives can work with a bank to refinance its loans, for example.

Is the income statement prepared first?

A company usually first prepares the income statement to break down its income and expenses. The items listed here help fill out other parts of the financial statement such as balance sheet and equity.

Who prepares the income statement?

A company’s internal finance and accounting team prepares the income statement and, for publicly traded companies, an auditor signs the financial statement as a stamp of approval.

What does not appear in the income statement?

Items that do not fall within the guidelines of generally accepted accounting principles are not presented in the income statement. Non-GAAP items derived from the income statement include Adjusted EBIT and EBITDA. Net income would also not show cash flows, assets and liabilities, and other items that would appear in the cash flow statement and balance sheet.

What is the pro forma income statement?

The pro forma income statement shows how a company’s income statement would appear for projected results if certain adjustments were made, sometimes in the hope of attracting potential investors. Some businesses, such as startups, use pro formas to show investors how they would achieve profitability for their business if specific costs were removed.

How is the income statement prepared?

The income statement first gathers the income, then the direct costs related to production, namely the cost of goods sold. Indirect costs, such as marketing and research and development, are then deducted. After all expenses are taken into account, the net income figure indicates profitability.

What is the relationship between the income statement and the balance sheet?

The income statement contains items relevant to the balance sheet. Net income reported for a period will also appear in retained earnings, which is listed in equity.