Income Statement

What it is

An income statement (also called a profit and loss or P&L statement) summarizes a company’s financial performance over a specific period. It reports revenues, expenses, gains, and losses and ends with net income (or loss). Together with the balance sheet and cash flow statement, the income statement helps users evaluate a company’s profitability and operational efficiency.

Key takeaways

• Shows revenue, expenses, gains, and losses for a period and calculates net income.
• Can be presented as a single-step or multi-step statement.
• Used by investors, creditors, and management to assess profitability, trends, and operational performance.

Core components

The four primary elements are:
* Revenue — income from core business activities (operating revenue) and ancillary sources (non-operating revenue).
* Gains — one-time or noncore positive results (e.g., sale of long-lived assets).
* Expenses — costs incurred to earn revenue, including cost of goods sold (COGS), selling, general & administrative (SG&A), depreciation, and R&D.
* Losses — one-time or noncore negative results (e.g., asset write-downs, legal settlements).

Additional breakdowns:
* Operating revenue/expenses — related to primary business activities.
* Non-operating revenue/expenses — related to secondary activities like interest income or interest expense.
* Continuing operations — income from activities expected to continue in the ordinary course of business.

Basic structure and formula

Net income is calculated as:
Net Income = (Revenue + Gains) − (Expenses + Losses)

A typical flow:
1. Total revenue
2. Less: cost of goods sold → Gross profit
3. Less: operating expenses (SG&A, R&D, depreciation) → Operating income (EBIT)
4. Add/subtract: non-operating items, gains/losses, interest → Pretax income
5. Less: taxes → Net income
6. Net income ÷ weighted average shares outstanding → Earnings per share (EPS)

Single-step vs. multi-step statements

• Single-step: Aggregates all revenues and gains, subtracts all expenses and losses in one calculation. Simpler and used by smaller or less complex businesses.
• Multi-step: Separates operating and non-operating items and reports profitability at multiple levels (gross, operating, pretax, and after-tax). Common for larger companies because it highlights where income is generated or consumed.

Simple example

A small sports merchandise business for one quarter:
* Sales of goods: $25,800
* Service revenue: $5,000
Total revenue = $30,800

• Operating expenses (COGS, rent, wages, etc.): $10,650
• Gain on sale of van: $2,000
• Loss from settlement: $800

Net income = (30,800 + 2,000) − (10,650 + 800) = $21,350

Real-world illustration (summary)

A large technology company typically reports:
* Total revenue
* Cost of revenue → Gross profit = Revenue − Cost of revenue
* Operating expenses (R&D, sales & marketing, G&A) → Operating income (EBIT)
* Other income/expense and taxes → Net income
Net income is then used to compute EPS by dividing by weighted average shares outstanding.

How income statements are used

• Investors: Evaluate profitability, margins, growth trends, and compare companies or sectors.
• Management: Diagnose operational strengths/weaknesses, control costs, and guide decisions such as expansion, asset purchases, or divestitures.
• Creditors: Assess earnings quality and trends to infer future cash flow capacity and creditworthiness.

What to watch for:
* Gross margin vs. operating margin — indicates whether high costs or operating expenses are eroding profits.
* Unusual one-time gains or losses — can distort underlying performance.
* Trends across periods — rising revenue with declining margins may signal cost pressure or pricing challenges.
* Composition of revenue — reliance on non-operating income can mask weak core operations.

FAQs

Q: What are the four key elements?
A: Revenue, gains, expenses, and losses.

Q: How does operating revenue differ from non-operating revenue?
A: Operating revenue comes from the company’s primary business (product sales or services). Non-operating revenue comes from ancillary sources (interest, rent, royalties).

Q: What insights should you look for?
A: Profitability drivers, margin trends, unusual items, and how operating performance compares with peers and prior periods.

Bottom line

The income statement translates a company’s activity over a period into a clear profit-or-loss result. By examining its components and trends, users can assess how effectively a company earns income, controls costs, and creates value for shareholders.