What is the Income Statement?

Income statement, AKA the sheet of profit and loss. As its name shows, it is a number sheet that shows all revenues, expenses, and profits of a company. The three financial statements together provide a comprehensive picture of a company's financial health.

An income statement is essential. For finance beginners, it is an easy-to-read financial statement. For investors, it implies a company's ability to generate revenue and profit. For business operators, it helps to decide whether they could increase profit by raising revenues or cutting costs. This piece of financial statement achieves these wonderful functions by breaking the business of a whole company into smaller parts. This makes it easy to find out the strength and weaknesses of the operation.

What are Items on the Income Statement?

The first item on it, also known as the top line, is the revenue. The revenue section is sometimes also referred to as "sales". Revenue is the total amount made from the company's core businesses.

In order to generate revenue, costs are necessary. The costs directly linked to the company’s operation are called operating expenses. Some general examples could be technology (subscription) fees, salaries, marketing costs, etc.

After subtracting operating expenses from revenue, we get the operating income. Still, there are other non-operating related costs. An obvious example could be tax. Other examples are interest income and interest expenses, which are items related to borrowing and lending. By adjusting for these additional income and cost items, we finally get the net profit (also referred to as net income).

To learn more on how to analyze the income statement through Excel, check the article: Excel: Income Statement Analysis.

As you see, the income statement is all about addition and subtraction. We add up all the "incomes" and subtract all the "expenses". The ending result is the net profit of a company. In the following articles, we will dig deeper into the details of the underlying items in the income statement.