The income statement is one of the three
core financial statements that reveals a company's revenues and
expenses over a specific time period, indicating whether it has
incurred profits or losses. It starts with listing revenue, often
called the "top-line," and then subtracts all key expenses to
calculate profit or loss, referred to as the "bottom-line," near the
end. Publicly traded companies issue income statements in their
quarterly and annual reports. Investors and analysts rely on income
statements to assess a company's business performance, including its
ability to manage expenses and generate profits. The income statement
is also known as the profit and loss statement, P&L statement,
earnings statement, statement of operations, or other similar terms.
The income statement displays how a company's revenue and expenses result in profits or losses, but it involves multiple line items. The income statement breaks down each revenue and expense line item that contributes to the bottom line. Additionally, it may contain non-operating gains and losses, which are gains or losses unrelated to the core business, such as selling assets or lawsuit costs.
Despite appearing complex, income statements are based on simple addition and subtraction calculations.
The income statement's top section depicts the conversion of revenue into gross profit, and its main components include:
Though not listed on the income statement, the gross margin can be calculated by dividing gross profit by revenue. The gross margin is an essential metric for analysts, particularly for companies with a high cost of revenue.
It's crucial to note that publicly traded US companies use accrual-based accounting, where revenue or expenses are recognized when incurred, irrespective of cash inflows or outflows. For instance, a company may record revenue when goods are delivered to customers, even if payment is made later. To assess the actual cash inflows and outflows, investors need to examine the cash flow statement.
Here's a brief summary of the three core financial statements: