Income Statement Structure#

The income statement is your window into a company's profitability. It answers the fundamental question: Is this company making money?

The income statement is also called the Profit and Loss Statement (P&L) or Statement of Operations. All three names refer to the same document.

The Top-to-Bottom Flow#

Unlike the balance sheet (a snapshot), the income statement tells a story from top to bottom. It starts with revenue and subtracts costs until you reach the bottom line: net income.

Revenue (Top Line)
    ↓ minus Cost of Goods Sold
= Gross Profit
    ↓ minus Operating Expenses
= Operating Income
    ↓ minus Interest & Taxes
= Net Income (Bottom Line)

Each line builds on the one above. Let's walk through each section.

1. Revenue (The Top Line)#

Revenue is where it all begins—the total money a company earns from its business activities before any expenses.

Term	Meaning
Revenue	Total sales or income
Net Revenue	Revenue after returns and discounts
Top Line	Another name for revenue

Why It's Called the Top Line

Revenue is literally at the top of the income statement. When people say a company is growing its "top line," they mean revenue is increasing.

2. Cost of Goods Sold (COGS)#

COGS represents the direct costs of producing what the company sells. This varies by business type:

Business Type	COGS Includes
Manufacturer	Raw materials, factory labor, production costs
Retailer	Cost of inventory purchased for resale
Software Company	Hosting costs, third-party licenses
Restaurant	Food ingredients, kitchen supplies

Gross Profit

\text{Gross Profit} = \text{Revenue} - \text{COGS}

3. Gross Profit#

Gross profit shows how much money remains after covering the direct costs of products or services.

This is a crucial number because it shows the fundamental profitability of what the company sells—before overhead and other expenses.

\text{Gross Margin} = \frac{\text{Gross Profit}}{\text{Revenue}} \times 100

A 40% gross margin means for every $1 of revenue, $0.40 remains after COGS.

4. Operating Expenses#

Operating expenses (OpEx) are the costs of running the business that aren't directly tied to production:

Category	Examples
Selling, General & Administrative (SG&A)	Salaries, marketing, rent, utilities, office supplies
Research & Development (R&D)	Product development, scientists, engineers
Depreciation & Amortization	Spreading asset costs over time

Operating Income

\text{Operating Income} = \text{Gross Profit} - \text{Operating Expenses}

5. Operating Income#

Operating income (also called EBIT - Earnings Before Interest and Taxes) shows profit from core business operations.

This is a key metric because it shows how well the actual business performs, before financing decisions (debt) and tax strategies affect the numbers.

Operating Margin

\text{Operating Margin} = \frac{\text{Operating Income}}{\text{Revenue}} \times 100

This tells you what percentage of each sales dollar becomes operating profit. Higher is generally better.

6. Interest and Taxes#

Below operating income, you'll find:

Interest Expense - Cost of debt (loans, bonds)
Interest Income - Earnings from cash and investments
Income Tax Expense - Taxes owed on profits

Net Income

\text{Net Income} = \text{Operating Income} - \text{Interest} - \text{Taxes}

7. Net Income (The Bottom Line)#

Net income is the final profit after all expenses. This is "the bottom line"—what's left for shareholders.

What Happens to Net Income
Paid out as dividends
Retained for growth (added to retained earnings)
Used to buy back shares

EPS tells you how much profit is attributable to each share of stock:

Earnings Per Share

EPS = \frac{\text{Net Income}}{\text{Shares Outstanding}}

EPS Type	What It Means
Basic EPS	Net income ÷ current shares outstanding
Diluted EPS	Accounts for potential future shares (options, convertibles)

Watch Diluted EPS

Diluted EPS is usually the more conservative (and realistic) number because it accounts for shares that could be created from stock options and convertible securities.

A Complete Example#

Here's a simplified income statement for a fictional company:

Line Item	Amount	Calculation
Revenue	$1,000,000
Cost of Goods Sold	($400,000)
Gross Profit	$600,000	60% margin
Operating Expenses	($350,000)
Operating Income	$250,000	25% margin
Interest Expense	($20,000)
Pre-tax Income	$230,000
Income Tax (25%)	($57,500)
Net Income	$172,500	17.25% margin

Shares Outstanding	100,000
EPS	$1.73

Key Terms to Remember#

Term	Also Known As	What It Shows
Revenue	Sales, Top Line	Total income before expenses
Gross Profit		Revenue minus direct costs
Operating Income	EBIT	Profit from core operations
Net Income	Earnings, Bottom Line, Profit	Final profit
EPS	Earnings Per Share	Profit per share

Key Takeaways

The income statement flows from revenue (top) to net income (bottom)
Gross profit shows profitability after direct costs (COGS)
Operating income shows profitability from core business operations
Net income is the final profit after all expenses and taxes
EPS translates net income into per-share terms
Margins (gross, operating, net) help you compare profitability across companies