Income Statement Explained: Definition, Real Examples, Analysis, And More (2024)

Academy Center > Analysis

AnalysisBeginner

written by

Andy Pai

Income Statement Explained: Definition, Real Examples, Analysis, And More (1)

Income Statement Explained: Definition, Real Examples, Analysis, And More (2)

Corporate Finance & Technology Development

VP Subscriptions, Investing.com

Finance & Economics, Indiana University. Entrepreneurship, YCombinator

    See Full Bio

    | updated

    Income Statement Explained: Definition, Real Examples, Analysis, And More (3)

    What Is An Income Statement?

    The income statement, or profit and loss statement, is one of the main financial statements of a business that shows its profit or loss for a specific period. Public companies operating in the United States are required by law to provide their income statement at the end of every quarter and fiscal year.

    The income statement starts with a company’s revenue and ends with its net profit after subtracting operating and non-operating expenses, such as cost of goods sold or SG&A (Selling, General & Administrative expenses). Having a complete understanding of the income statement is essential for investors to analyze a company’s long-term outlook.

    Income Statement Explained: Definition, Real Examples, Analysis, And More (4)

    Advertisem*nt

    Income Statement: A Real Example

    Now that you have the idea of what an income statement is, let’s look at a real example. Here’s Apple’s income statement, or consolidated statement of operations, from its 2021 10-K or annual filing.

    Income Statement Explained: Definition, Real Examples, Analysis, And More (5)

    Source: Apple’s 2021 10-K

    Here’s a simplified version from InvestingPro:

    Source: InvestingPro+

    We’ll use that to break down the income statement more in detail.

    Advertisem*nt

    Income Statement Items

    As discussed above, the income statement starts with a company’s revenue and ends with its net profit after subtracting operating and non-operating expenses. Here, we’ll analyze what goes on an income statement and discuss the various income statement items.

    Note: The income statement may vary slightly for companies operating in different sectors and industries. For instance, companies operating in the banking industry don’t have the cost of goods sold on their income statement.

    Sales/Revenue

    Revenue is the top-line of the income statement and represents the company’s income from sales of goods or services before subtracting any kind of expenses. If a company generates sales from different sources, it can list them in the income statement, as Apple does.

    Income Statement Explained: Definition, Real Examples, Analysis, And More (8)

    Cost Of Goods Sold (COGS)

    The cost of goods sold line, or cost of sales, represents the total costs of manufacturing the products sold by the company. It includes items like labor and raw materials.

    Gross Profit or Gross Margin

    The gross profit is equal to revenue minus cost of goods sold. It is also known as gross margin. This may generate some confusion for novice investors since the term gross margin can also mean the gross profit as a % of revenue.

    In Apple’s case, they report the cost of sales for their respective segments, and then call that gross margin. In InvestingPro, you can see the gross profit dollars and then the gross profit margin % (Apple’s rose from 38.2% to 41.8% in their fiscal year 2021).

    Income Statement Explained: Definition, Real Examples, Analysis, And More (9)
    Income Statement Explained: Definition, Real Examples, Analysis, And More (10)

    Operating Expenses and Operating Income

    Operating expenses represent the costs incurred by a company to run its core operations. The most common operating expenses are SG&A expenses (Selling, General & Administrative expenses), that consist of non-manufacturing costs like marketing, accounting, human resources, and more. Another typical operating expense is R&D (Research & Development), which consists of costs to design new products, technologies, or services.

    Income Statement Explained: Definition, Real Examples, Analysis, And More (11)

    Take revenue, subtract the cost of goods sold, and you get gross profit. Then remove the operating expenses mentioned and you get the company’s operating income.

    Operating income is how much money the company makes just running the business, before getting into any financial costs, unusual costs, or taxes. It’s often looked at as a way to understand what the “core profitability” of a company is.

    Non-Operating Expenses

    Non-operating expenses are costs that are not related to a company’s core operations. Interest expense is one of the most common non-operating expenses. “Other income/expense” is often included in this section and can include changes in the value of assets the company owns (if it owns shares in another public business for example).

    In Apple’s case, in 2021 it earned nearly $200 million in interest, a sign of the company’s balance sheet strength.

    Income Statement Explained: Definition, Real Examples, Analysis, And More (12)

    Income Tax

    The income tax line represents the total amount of taxes paid by the company during a specific period.

    Income Statement Explained: Definition, Real Examples, Analysis, And More (13)

    Net Income

    Net income, or net profit, is what remains for the business after subtracting all costs and taxes, plus any income that is owed to preferred stock shareholders, other entities, or anybody else that gets in the way of the common stock shareholder.

    Income Statement Explained: Definition, Real Examples, Analysis, And More (14)

    The income statement will often also show the earnings per share, based on both basic shares outstanding and diluted shares outstanding. This makes it easier to calculate a price to earnings ratio (or p/e ratio) for a given company.

    Multi-Step Income Statement

    Apple’s income statement that we’ve just analyzed is a multi-step income statement. A multi-step income statement categorizes a company’s expenses into different groups based on their nature. Public companies operating in the United States are required by law to use a multi-step income statement since it provides the most accurate analysis of the business.

    Income Statement Explained: Definition, Real Examples, Analysis, And More (15)

    Single Step Income Statement

    While a multi-step income statement categorizes a company’s expenses into different groups based on their nature, a single-step income statement gets to a company’s net income with a simple formula that subtracts all the expenses from the company’s revenue.

    Income Statement Explained: Definition, Real Examples, Analysis, And More (16)

    Importance of the Income Statement

    A company’s income statement will give the most basic assessment of how its business is doing. It shows what its sales are, whether it is growing compared to the prior year (on a quarterly report) or compared to previous years (on the annual report), how much profit the company books on its sales, and how much money is left for shareholders, which is the net income. You can also see trends in the company’s costs, in its share count, and you can get a hint of its financial position in the interest expenses.

    You need more than the income statement to evaluate a company. A balance sheet shows its financial position in much more detail, and is a key piece of understanding the company’s financial health and, along with the company’s share count and current share price, the price the company is being valued at by the market.

    The cash flow statement shows how good a job the company does at converting sales into actual cash that will go on the balance sheet or be paid out to shareholders.

    Each of these together give a full picture of a company’s health, prospects, and future. The income statement is often the first statement reported in filings, as it is the most “classic” explanation of a business’s results. But it is also just the first piece in the puzzle.

    Advertisem*nt

    As an enthusiast and expert in the field of Corporate Finance and Technology Development, I bring to the table a wealth of knowledge and hands-on experience in analyzing financial statements and understanding the intricacies of business operations. My background includes a comprehensive education in Finance and Economics from Indiana University, coupled with entrepreneurial insights gained from YCombinator. Currently serving as the VP Subscriptions at Investing.com, my expertise is grounded in real-world applications, enabling me to dissect and interpret complex financial concepts with precision.

    Now, let's delve into the key concepts presented in the article written by Andy Pai, an expert in Corporate Finance and Technology Development:

    1. Income Statement (Profit and Loss Statement):

      • Definition: The income statement is a vital financial statement that reveals a business's profit or loss over a specific period.
      • Purpose: It provides an overview of a company's sales, expenses, and net profit, offering crucial insights for investors.
    2. Income Statement Items:

      • Sales/Revenue:
        • Definition: The top-line figure representing a company's income from sales of goods or services before deducting expenses.
      • Cost Of Goods Sold (COGS):
        • Definition: Total costs associated with manufacturing the products sold, including labor and raw materials.
      • Gross Profit or Gross Margin:
        • Definition: Revenue minus COGS, indicating the profit made from the core business operations.
    3. Operating Expenses and Operating Income:

      • Operating Expenses:
        • Definition: Costs incurred to run core business operations, including SG&A (Selling, General & Administrative expenses) and R&D (Research & Development).
      • Operating Income:
        • Definition: The profit generated from running the business before accounting for financial costs, unusual costs, or taxes.
    4. Non-Operating Expenses:

      • Definition: Costs unrelated to a company's core operations, such as interest expenses and other income/expense reflecting changes in the value of assets.
    5. Income Tax:

      • Definition: Represents the total taxes paid by the company during a specific period.
    6. Net Income:

      • Definition: The remaining profit for the business after subtracting all costs, taxes, and any obligations to preferred stock shareholders.
    7. Multi-Step vs. Single Step Income Statement:

      • Multi-Step Income Statement:
        • Definition: Categorizes a company's expenses into different groups for a more detailed analysis.
      • Single Step Income Statement:
        • Definition: Simplified formula subtracting all expenses from revenue to determine net income.
    8. Importance of the Income Statement:

      • Highlights the fundamental assessment of a company's performance, including sales growth, profitability, and net income.
      • Emphasizes the need for a holistic approach, incorporating balance sheets and cash flow statements for a comprehensive understanding of a company's health, prospects, and valuation.

    In conclusion, a thorough comprehension of the income statement is crucial for investors to make informed decisions about a company's long-term outlook, as showcased by the expert insights shared in the article by Andy Pai.

    Income Statement Explained: Definition, Real Examples, Analysis, And More (2024)

    References

    Top Articles
    Latest Posts
    Article information

    Author: Errol Quitzon

    Last Updated:

    Views: 5993

    Rating: 4.9 / 5 (79 voted)

    Reviews: 94% of readers found this page helpful

    Author information

    Name: Errol Quitzon

    Birthday: 1993-04-02

    Address: 70604 Haley Lane, Port Weldonside, TN 99233-0942

    Phone: +9665282866296

    Job: Product Retail Agent

    Hobby: Computer programming, Horseback riding, Hooping, Dance, Ice skating, Backpacking, Rafting

    Introduction: My name is Errol Quitzon, I am a fair, cute, fancy, clean, attractive, sparkling, kind person who loves writing and wants to share my knowledge and understanding with you.