How to read an Income Statement


What is an Income Statement?

It’s a standard financial document that summarizes the company’s revenues and expenses for a period of time.

What are the other names for this document?

  • P&L Statement (Profit and Loss)
  • Income Statement
  • Earnings Statement

Any other confusing terms?

Profit, Income and Earnings all mean the same thing.

How many times does it go out/year?

There are reports that go out every quarter (every 3 months) and at the end of the year.


Sales Revenue or Gross Revenue

What the company has sold during the period, or the “top line” (as opposed to the “bottom line”).
If they have many streams or lines of revenue (also called product lines or services), then they usually give a breakdown, and a total called Total Sales Revenue. It’s their gross income.

Sales Costs or Cost of Goods Sold (COGS)

This tells you what it costs the company to generate Total Sales Revenue (above). The analysis given is the total costs to the total revenue generated above. In addition, it also looks at the cost of each product line or service.

The lower is not necessarily always the better. You have to compare income statements with other similar companies in the same industry.

Gross Profit or (Loss) or Gross Margin

It’s the difference between Sales Revenue and Sales Costs.

Gross profit means the money left to cover all of the OTHER expenses you have above what you have to buy to re-sell, such as buying beads or beading supplies for a jewellery business.

If it’s positive = the company made a profit. Woo hoo!
If it’s negative = the company didn’t. And you can see it shown in brackets

The higher the gross margin, the higher the chance of a positive net income year after year, which means the company isn’t on the edge of losing money the next year.

General & Administrative expenses (G&A)

These are overhead expenses a company has, which means what it costs to run a company. It isn’t the same as COGS because it isn’t associated with producing or making anything.

The lower, the better, because it means there aren’t many employees, and they’re all assumed to be running at full efficiency, and it’s a sign of good management.

Conversely, the higher it is, the more it means that management may not be doing such a hot job.

Sales & Marketing expenses

More costs. Not G&A, not COGS, but the costs related to producing a product or service to sold.

These are hard to pin down and kind of vague because marketers don’t have extremely hard facts for example – I invest 1% of the budget in advertising, and I see a 1.5% growth of sales for a certain product in a certain age group.

These costs should be monitored and compared frequently to similar numbers from other competitors in the industry at the same point in what they call a life cycle.

So if the iPhone is being released beside a Blackberry lookalike, Apple and Research in Motion (RIM) should be compared by using publicly published reports like this Income Statement to see how much each company is spending.

Research & Development (R&D) expenses

You have certainly heard of this. It’s what part of the income the company puts into the business to develop new products. Look at whether it is increasing or decreasing from year to year. If it increases, then management could be considered creative, innovative and trying to find new technologies.

Operating Income or EBITDA

Gross Profit minus Operating Expenses = Operating Income

EBITDA = Earnings Before Interest Taxes Depreciation and Amortization, and is used to mean Operating Income.

Income Before Taxes or EBIT

The company gets taxed on this income.

Total Operating Income minus Interest paid on any Debts = Income Before Taxes
EBIT = Earnings Before Interest Taxes, and means Income before Taxes.


What they pay or should pay in taxes.

Net Income From Continuing Operations

After subtracting taxes from its income, this is what the company has left to work with. It’s their Take-Home pay, or net pay.

Profit Margin

The higher, the better. But it varies, so you should compare within similar companies.

Think of it as the interest rate you get on a loan. If you see a low profit margin, it means your stock doesn’t have a good profit margin and may need some restructuring to cut costs (see all costs above).

Non-recurring Events or Special Items or Extraordinary Expenses

One-off expenses, like layoffs. If an expense is recurring yearly, then it’s considered a “Continuing Operations” cost.

Net Income

So after all of those events, this is the final net income – Total Revenue minus all expenses.

The bigger, the better.

Dividends to Shareholders

Usually only paid once a year. It’s what you divide up out of the profit to distribute to shareholders.

Net Income Available to Shareholders

The so-called “bottom line”, or what is left at the end of the period. This money is used to re-invest in the company decided by the Board of Directors, kept on the books for future needs or given back to investors in the future.


Gross Income = How much gross revenue they made

You want to know how much they pull in each year. If they make a ton of money, it’s a good business. Then it’d just be a matter of cutting expenses or spending the money more wisely.

Operating Income = Gross Profit (which is Gross Revenue minus COGS), minus G&A, R&D and Sales and Marketing Expenses.

This is more reliable than net income because it minuses out all of the major costs such as the cost to buy the supplies, goods or services for selling, without overhead expenses, research and development and the sales/marketing expenses.

It’s a better measure of profitability than Net Income after Taxes, because the rest is just taxes or one-off events.

Pre-Tax Income = Income before taxes

Alternatively, some think that Pre-Tax income before taxes is a better measure of profitability because you can’t cheat on taxes.

Net Income after Tax = Income after taxes

Good to know. Use it to compare against the other measures of profitability to see where you’re spending a ton of cash (one-off expenses? or on taxes?)


About the Author

Just a girl trying to find a balance between being a Shopaholic and a Saver. I cleared $60,000 in 18 months earning $65,000 gross/year. Now I am self-employed, and you can read more about my story here, or visit my other blog: The Everyday Minimalist.