# 102-16 What Is An Income Statement & How To Analyze It

## What is an income statement?

The income statement, also known as the profit and loss statement (P&L), tells us what made the company profitable or unprofitable for the period. It lists the revenue and the cost of generating that revenue and deducts any taxes paid.

The amount of money left after expenses and taxes is known as income.

## What is the purpose of an income statement?

An income statement summarizes a company’s revenue and expenses over a specific period. It can help investors and other interested parties better understand a company’s financial stability and performance. Additionally, the statement can be used to assess a company’s performance relative to its competitors.

## How to read an income statement?

Reading an income statement is simple. You must look at the different line items and understand what they mean. The most important line item on an income statement is revenue, the amount of money a company brings in through its sales. Other line items include costs of goods sold, operating expenses, and net income. Understanding these line items gives you a good sense of how a company performs financially.

## What items are on an income statement?

An income statement is a financial statement that shows a company’s earnings over a specific period. It includes revenue, expenses, and profit or loss.

 Example Income Statement For Company ABC
 (Figures USD) 2020 2021 Net Sales 500,000 1,000,000 Cost of Sales (250,000) (300,000) Gross Profit 250,000 700,000 Operating Expenses (SG&A) (50,000) (70,000) Operating Income 200,000 630,000 Other Income (Expense) 20,000 30,000 Extraordinary Gain (Loss) – – Interest Expense (5,000) (5,000) Net Profit Before Taxes (Pretax Income) 215,000 655,000 Income Taxes (75,000) (200,000) Net Income 140,000 455,000

### What are net sales on the income statement?

Net sales on the income statement are the company’s total revenue from selling its products and services. This figure is typically found at the bottom of the statement. It represents the amount of money brought in after all costs associated with generating this revenue have been deducted.

Net Sales is the total cash or equivalent from selling goods or services.

How to Read the Income Statement Like a Pro Investor

### What is the cost of sales on the income statement?

The cost of sales on the income statement is the total amount of money a company has spent to generate revenue. This figure includes the cost of goods sold and any associated operating costs. It is typically found above net sales and represents the money expended to generate revenue.

The cost of sales is the total cost of manufacture, raw materials, equipment, employees, building maintenance, and depreciation.

### What is the gross profit on the income statement?

The Gross profit on the income statement is the difference between net sales and the cost of sales. This figure represents the amount of money a company has earned after accounting for the costs associated with generating its revenue. It is typically found in the middle of the income statement and can be used to gauge a company’s overall profitability.

### What are operating expenses on the income statement?

The operating expenses on the income statement are the costs associated with running a company’s day-to-day operations. This figure includes things such as salaries, rent, and advertising costs. It is typically found just above the gross profit on the income statement and represents the amount spent on maintaining a company’s revenue stream.

### What is operating income on the income statement?

The operating income on the income statement is the difference between operating expenses and the gross profit. This figure represents the amount of money a company has earned after accounting for the costs of running its day-to-day operations. It is typically found at the top of the income statement and can gauge a company’s overall profitability.

### What is the interest expense on the income statement?

The Interest expense on the income statement is the amount of money a company has spent to finance its operations. This figure includes the interest payments on any outstanding debt and the interest payments on outstanding investments. It is typically found just below the operating income on the income statement. It represents the money expended to maintain a company’s revenue stream.

### What is the Net profit on the income statement?

The Net profit on the income statement is the difference between operating income and interest expense. This figure represents the amount of money a company has earned after accounting for the costs associated with running its day-to-day operations and financing them. It is typically found at the very bottom of the income statement and can be used to gauge a company’s overall profitability.

### What are taxes on the income statement?

The taxes on the income statement are the amount of money a company has paid to the government to generate revenue. This figure includes both federal and state taxes, as well as any other applicable taxes. It is typically found just below net profit on the income statement. It represents the money paid to the government to maintain a company’s revenue stream.

### What is net income on the income statement?

The Net income on the income statement is the difference between net profit and taxes. This figure represents the amount of money a company has earned after accounting for the costs associated with running its day-to-day operations, financing its operations, and paying its taxes. It is typically found at the very bottom of the income statement and can be used to gauge a company’s overall profitability.

## How to analyze an income statement

Now that you know how to read an income statement, you need to know how to analyze it. There are a few things you should look for when analyzing an income statement.

The first thing to look at is revenue. You want to ensure the company brings in enough money through its sales to cover its costs. You can do this by comparing the revenue to the costs of goods sold. If the company’s revenue is less than its costs of goods sold, it is not making a profit.

Another thing to look at is operating expenses. Operating expenses include things like marketing, administrative costs, and rent. You want to ensure these expenses are not too high, affecting a company’s profits.

Finally, you want to look at net income. This is the amount of money a company has left over after paying its expenses. A high net income is good news for a company, as it makes more money than it is spending. A low net income is bad news, which means the company is losing money.

## Is an income statement the same as profit and loss?

No, an income statement is not the same as profit and loss. An income statement shows how much a company has earned over time. It includes revenue, expenses, and profit or loss. Profit and loss are different calculations that show how much money a company has made or lost over a specific period.

## What is a multi-step income statement?

A multi-step income statement shows how a company has made or lost money over a specific period. It includes revenue, expenses, and profit or loss. The revenue and expenses are broken down into different categories to help understand how a company performs financially.

## What is a pro forma income statement?

A pro forma income statement shows how a company will make or lose money over a specific period. It includes revenue, expenses, and profit or loss. The revenue and expenses are broken down into different categories to help understand how a company performs financially.

## The difference between a pro forma and a multi-step income statement

The difference between a pro forma and a multi-step income statement is that a pro forma income statement shows how a company will make or lose money over a specific period.

A multi-step income statement shows how a company has made or lost money over a specific period. It includes revenue, expenses, and profit or loss. The revenue and expenses are broken down into different categories to help understand how a company performs financially.

## Red flags on the income statement

Special Note: Always watch out for anything marked as special items or extraordinary expenses. These are allowed for in the generally accepted accounting principles (GAAP) but only as one-off charges for restructuring or closing business units, such as redundancy payments. These may be significant enough to alter the post-tax profit figure from a healthy profit to a minor loss. It would be best to consider these in your company valuation.

## Income Statement FAQs

### Do accounts receivable go on an income statement?

No, accounts receivable do not go on an income statement. They are a part of the balance sheet.

### Does unearned revenue go on the income statement?

No, unearned revenue does not go on the income statement. It is a part of the balance sheet.

### Is depreciation expense on the income statement?

Depreciation expense is not on the income statement. It is a part of the balance sheet.

### Do accounts receivable go on the income statement?

No, accounts receivable do not go on the income statement. They are a part of the balance sheet.

### Are dividends on the income statement?

No, dividends are not on the income statement. They are a part of the balance sheet.

### Are supplies an expense on the income statement?

No, supplies are not an expense on the income statement. They are a part of the balance sheet.

## Summary

The major categories within an income statement are revenue, expenses, and net income. These are the three most important metrics when analyzing an income statement. Now that you are familiar with the income statement, the next lesson covers the balance sheet.