Income Statement Structure
Learn the layout and key components of the income statement.
Learning Objectives
- Understand the top-to-bottom structure of an income statement
- Identify the main line items from revenue to net income
- Learn key terminology used in income statements
- See how each section builds on the previous one
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 |
Revenue - COGS = Gross Profit
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.
Gross Margin is gross profit as a percentage of revenue:
Gross Margin = (Gross Profit ÷ Revenue) × 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 |
Gross Profit - Operating Expenses = Operating Income
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
Operating Margin = (Operating Income ÷ Revenue) × 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
Operating Income - Interest (net) - Taxes = Net Income
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 |
8. Earnings Per Share (EPS)#
EPS tells you how much profit is attributable to each share of stock:
EPS = Net Income ÷ 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