How to Read an Income Statement

An income statement is a financial document that shows the amount of revenue a company earned during a specific time period (e.g. a year). This document is broken down by the costs and expenses associated with earning that revenue. Investors use this information to see how much money a company earned or lost within the defined period. This final calculated value is referred to as the bottom line or net income.

Income Statements also report Earning Per Share or EPS. EPS informs investors and shareholders how much money they would receive if the company distributed all of the net earnings for the period.

The process for calculating the net income on an Income Statement can be understood by reading down the document and taking into account each of the following steps in the order presented below.

  1. Top Line or Gross Revenues/Sales: Located at the top of the document, this value is the total amount of money earned through the sales of the company’s goods or services.
  2. Returns & Allowances: money lost or unrepairable due to sales discounts or returns.
  3. Net Revenues: The value calculated by (Gross Revenues)- (Returns & Allowances)
  4. Costs of Goods Sold: The amount of money spent that can be directly linked to the production of the products or services being sold in the reporting period.
  5. Gross Profit/Margin: The value expressed as (Sales of Goods or Services)- (Costs of Goods Sold). This value does not factor in operating expenses.
  6. Operating Expenses: The costs of doing business. This value is the sum of all salaries, benefits, advertising, rent, utilities, depreciation and other operating costs not associated with costs of goods sold.
  7. Depreciation/Amortization: The amount of value attached to an asset that is lost over time due to normal wear & tear. These costs of depreciation are spread over the multiple reporting periods during an assets life.
  8. Operating Profits: Gross profit minus operating expenses and depreciation.
  9. Operating Profit Before Income Tax: (Operating Profits) - (Interest Income-Interest Expense).
  10. Net Profit/ Bottom Line: (Operating Profit Before Income Tax)- (Income Tax). This is the final value in the Income Statement. This values denotes whether the company realized a loss or profit during the reporting period.