An income statement, also known as a profit and loss statement or P&L, is a financial statement that reports a company's revenues and expenses over a specific period of time, usually a quarter or a year. The purpose of the income statement is to show whether the company made a profit or incurred a loss during the period being reported.
The income statement starts with the company's total revenues for the period, which includes any sales or services provided by the company. The cost of goods sold (COGS) is then subtracted from the revenues to arrive at the gross profit. COGS represents the direct costs associated with producing the goods or services sold by the company, such as the cost of raw materials, labor, and production overhead.
Next, the operating expenses of the company are deducted from the gross profit to arrive at the operating profit or earnings before interest and taxes (EBIT). Operating expenses can include items such as rent, salaries and wages, utilities, and marketing expenses.
Interest expenses and taxes are then subtracted from the EBIT to arrive at the net profit or earnings after taxes (EAT). Finally, any dividends paid to shareholders are subtracted from the EAT to arrive at the company's retained earnings, which is the amount of profit that is kept by the company for future use.
The income statement is an important financial statement that helps investors, analysts, and other stakeholders evaluate a company's financial performance and profitability over a specific period of time.
Above is a sample income statement of TSLA.
Reading an income statement requires an understanding of its basic structure and components. Here are the key elements of an income statement and how to read them:
Revenue: This is the total amount of money earned by the company during a specific period. It is usually listed first on the income statement.
Cost of goods sold (COGS): This is the direct cost of producing the goods or services sold by the company. It includes the cost of raw materials, labor, and other direct costs. Subtracting COGS from revenue gives the gross profit.
Gross profit: This is the profit made by the company after subtracting COGS from revenue. It is an important metric as it shows the profitability of the company's core business activities.
Operating expenses: These are the expenses incurred in running the business, such as salaries, rent, utilities, and marketing costs. Subtracting operating expenses from gross profit gives the operating profit.
Operating profit: This is the profit made by the company from its core business activities. It does not include any interest or taxes.
Other income and expenses: These are any non-operating income or expenses that do not directly relate to the company's core business activities, such as investment gains or losses.
Net income: This is the final profit made by the company after subtracting all expenses, including interest and taxes.
To read an income statement, start by looking at the revenue and COGS to calculate the gross profit. Then, review the operating expenses and subtract them from the gross profit to calculate the operating profit. Finally, review the other income and expenses and subtract them from the operating profit to calculate the net income.