income statement is a report that shows how much revenue a company earned over a specific time period (usually for
a year or some portion of a year). An income statement also shows the costs and expenses associated with earning
that revenue. The literal “bottom line” of the statement usually shows the company’s net earnings or losses. This
tells you how much the company earned or lost over the period.
statements also report earnings per share (or “EPS”). This calculation tells you how much money shareholders would
receive if the company decided to distribute all of the net earnings for the period. (Companies almost never
distribute all of their earnings. Usually they reinvest them in the business.)
understand how income statements are set up, think of them as a set of stairs. You start at the top with the total
amount of sales made during the accounting period. Then you go down, one step at a time. At each step, you make a
deduction for certain costs or other operating expenses associated with earning the revenue. At the bottom of the
stairs, after deducting all of the expenses, you learn how much the company actually earned or lost during the
accounting period. People often call this “the bottom line.”
top of the income statement is the total amount of money brought in from sales of products or services. This top
line is often referred to as gross revenues or sales. It’s called “gross” because expenses have not been deducted
from it yet. So the number is “gross” or unrefined.
next line is money the company doesn’t expect to collect on certain sales. This could be due, for example, to sales
discounts or merchandise returns.
you subtract the returns and allowances from the gross revenues, you arrive at the company’s net revenues. It’s
called “net” because, if you can imagine a net, these revenues are left in the net after the deductions for returns
and allowances have come out.
down the stairs from the net revenue line, there are several lines that represent various kinds of operating
expenses. Although these lines can be reported in various orders, the next line after net revenues typically shows
the costs of the sales. This number tells you the amount of money the company spent to produce the goods or
services it sold during the accounting period.
next line subtracts the costs of sales from the net revenues to arrive at a subtotal called “gross profit” or
sometimes “gross margin.” It’s considered “gross” because there are certain expenses that haven’t been deducted
from it yet.
next section deals with operating expenses. These are expenses that go toward supporting a company’s operations for
a given period – for example, salaries of administrative personnel and costs of researching new products. Marketing
expenses are another example. Operating expenses are different from “costs of sales,” which were deducted above,
because operating expenses cannot be linked directly to the production of the products or services being sold.
Depreciation is also deducted from gross profit. Depreciation takes into account the wear and tear on some
assets, such as machinery, tools and furniture, which are used over the long term. Companies spread the cost of
these assets over the periods they are used. This process of spreading these costs is called depreciation or
amortization. The “charge” for using these assets during the period is a fraction of the original cost of the
all operating expenses are deducted from gross profit, you arrive at operating profit before interest and income
tax expenses. This is often called “income from operations.”