An income statement, also known as a profit and loss statement (P&L), is a financial document that shows a company’s revenues, expenses, and profits or losses over a specific period, usually a quarter or year. It provides insight into a company’s operational efficiency and profitability.
Key Components of an Income Statement
- Revenue (Sales): The total income generated from the sale of goods or services. It is often broken down into:
- Gross Revenue: Total sales before any deductions.
- Net Revenue: Revenue after returns, discounts, and allowances are subtracted.
- Cost of Goods Sold (COGS): The direct costs associated with producing goods or services sold by the company (e.g., raw materials, direct labor).Gross Profit = Revenue – COGS
- Operating Expenses: Costs that are not directly tied to production but are necessary to run the business. These can include:
- Selling, General, and Administrative Expenses (SG&A): Salaries, rent, utilities, marketing expenses.
- Depreciation and Amortization: The allocation of the cost of tangible and intangible assets over time.
- Other Income and Expenses: Includes non-operating income like interest income and expenses like interest on debt.Earnings Before Tax (EBT) = Operating Income + Other Income – Other Expenses
- Taxes: The amount paid in corporate taxes.Net Income = EBT – Taxes
Formula Summary
- Revenue – COGS = Gross Profit
- Gross Profit – Operating Expenses = Operating Income
- Operating Income ± Other Income/Expenses = Earnings Before Tax (EBT)
- EBT – Taxes = Net Income
The income statement helps investors, creditors, and management assess the company’s financial health, profitability, and ability to generate revenue.
