What is Income statement?
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In short
The report showing how much a company sold over a period (a quarter or a year), what it spent and how much profit was left.
Also known as: P&L, profit and loss
The income statement (P&L) shows how much a company sold over a period (a quarter or a year), what it spent and how much profit was left at the end. You can read it top to bottom like a staircase.
The main lines
- Revenue — total money from sales.
- Cost of revenue → subtracting it leaves gross profit. Its ratio to revenue is the gross margin.
- Operating expenses — salaries, marketing, research (R&D), administration → subtracting them leaves operating income (operating margin).
- Interest, taxes and other items → at the bottom, net income.
- Net income ÷ share count = EPS.
What to look for
The trend matters more than any single number: is revenue growing, are margins expanding or shrinking? If revenue grows while profit falls, costs may be getting out of control.
Limitation
The statement is prepared on an accrual basis: a sale can be recorded before the cash arrives. So always compare profit with the cash flow statement. One-off items (asset sales, restructuring) can also distort net income.
Of every $100 in sales, $20 is left after costs, expenses and tax. The higher the margin, the more efficient the business.
One year of the fictional company Nur Tech. Of every $100 in sales, $40 goes to cost of revenue, $35 to operating expenses and $5 to tax — $20 is left for shareholders.
Example
A hypothetical company, annual results ($ millions):
- Revenue: 1,000
- Cost of revenue: −600 → gross profit 400 (gross margin 40%)
- Operating expenses: −250 → operating income 150 (operating margin 15%)
- Interest expense: −10, taxes: −30 → net income 110 (net margin 11%)
With 100 million shares, EPS = $110M ÷ 100M = $1.10.
The next year revenue grows 10% to 1,100 but operating income falls to 140. Costs grew faster than revenue — a signal worth investigating.
Mistakes and tips
Don't look only at EPS — check revenue growth and the direction of margins too.
Compare "adjusted" profit with official GAAP profit: if the gap is large, check what was excluded.
Compare a quarter with the same quarter last year rather than the previous quarter — many businesses are seasonal.
Frequently asked questions
- Where can I find a company's income statement?
- US companies file it with the SEC every quarter in the 10-Q and every year in the 10-K. It is also on the company's investor relations website.
- What is the difference between revenue and profit?
- Revenue is the total money from sales. Profit is what is left after all expenses are subtracted from it.
Learn it in the Academy
This term is covered with hands-on examples and a quiz in these lessons of the interactive course.
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