An income statement is one of the three core financial statements used for reflecting and reporting a company's financial performance over a certain period. The other two statements are the balance sheet and cash flow statement.
The income statement, also known as the profit and loss statement, focuses on the company's earnings and expenses during a specific period (usually annually).
The main objective of an income statement is to report the company’s profit as it measures the level of stability and capability of company to stakeholders.
The most common components of an income statement are:
The income received by selling goods or services is referred to as revenue. Other well-known synonyms for revenue are sales and earnings. Revenues are recorded at the top of the income statement and are also known as the "top line".
Cost of Goods Sold (-)
The direct costs of producing the products and/or services offered by the company are referred to as the cost of goods sold. This would include all the materials, labor, and other costs used during the process of production.
Gross Profit (loss) =
Gross profit (or loss) is the difference between the revenue received for the products and/or services less the cost of goods sold.
Marketing and Advertising Expenses (-)
It is the expenses to market and advertise for the company’s products and/or services to consumers though different channels.
Selling, General and Administrative (SG&A) Expenses (-)
SG&A expenses aren't related to the direct expenses such as manufacturing and production expenses. it may be related to different expenses such as rent, utilities, insurance, legal fees, and certain salaries.
It represents earnings before interest, taxes, depreciation, and amortization. It measures a company's overall financial performance from its core operations without the effects of non-operational expenses.
Depreciation & Amortization Expense (-)
This is the expense for the reduction in value for the company’s assets over time.
Operating Income (Loss) or EBIT =
Operating income (loss) shows the amount earned from the company’s operation after subtracting the depreciation and amortization expense.
Interest expense (-)
It is a non-operating expense shown on the income statement and it represents interest charged on debts and any other obligation that may require interest on it.
Other Income or Expenses (-)
Any income/expense that is not related to the company’s operations.
A financial charge imposed by the government.
Net income =
Net income, also called net profit and is the end result of the above additions and substractions that flows into retained earnings on the balance sheet, after paying any dividends.