“As long as the outcome is the income.”
Drake
Net Income = Revenue – Expenses
It feels really simple, doesn’t it? It’s about as basic as it gets. Known by a couple other names, like the consolidated statement of operations and the Profit & Loss statement (P&L), the income statement is a long look (not a snapshot) of a company’s profits and losses. Like the balance sheet or statement of cash flows, it’s important for fathers to grasp when considering making future investments. You should look at each of these statements in order to paint the full picture of the health of a firm and the quality of its earnings.
Considerations When Looking at the Income Statement
- Income Tax is taken from income which is derived from Revenues minus Expenses (not Sales)
- “Prepaid expenses” are not expenses, but Assets on the Balance Sheet
- “Unearned Revenue” are not revenues, but Liabilities on the Balance Sheet
Common Components of the Income Statement
Revenues are the sources of assets earned through business operations, also known as sales revenue.
Expenses are the uses of assets in business operations, and otherwise referred to as Cost of Goods Sold (COGs).
Gross Profit is the difference between revenues and COGs.
Income Tax is the amount the government takes from your gross profit and is calculated by varying percentages.
Net Profit is the final amount on the statement and is calculated by subtracting the income tax from pre-tax income. This is also known as the “bottom line” since it’s the final figure at the bottom of the income statement.
Check out this example of Amazon’s income statement, courtesy of CFI, here:
