Business Education
Understanding Income Statements





Learning Objectives

The income statement ( also called Profit and Loss Statement) is a basic financial document reporting the operations of a business firm over a period of time, usually one year. This statements shows the operating performance of a company which enables management to review and take corrective action based on its results. The following gives the reader the key components of a income statement which lists in order the types of information reported to various investors, management, employees, government, and the general public.


Income Statement
Revenues ( or Sales )

Revenues or sales is the amount of money a company collects from customers through normal operating activities. Some financial statements may offer different types or components of revenue to show the reader specifically where the firm generated its revenue.

Cost of Goods Sold

The cost of goods sold represents the total costs of manufacturing a product or providing a service which generated the sales or revenues. Costs of Goods sold can include labor and materials specifically associated with generating revenues.

Gross Margin

Gross Margin is the difference between the revenues and cost of goods sold. Gross margin should always be at least stable or rising.

Operating Expenses.

Operating expenses represent general overhead costs associated with operating a business entity. this can include repair, equipment and supplies purchases, labor costs, executive salaries, utility payments. In general, these expenses tend to be indirectly related to generating revenues.

Net Income Before Taxes

Net Income Before Taxes (NIBT) represent the income after deductions of operating expenses but before taxes are paid.

Income Taxes

Income taxes are paid to the government which are based on the amount of income generated by the company. Taxes are generally paid on a quarterly-based estimate.

Net Income

Net income (or loss) is the residual amount left over to shareholders after a company pays its taxes under General Accepted Accounting Principles (GAAP).

Earnings Per Share

Earnings per share (EPS) is the amount of earnings that each share of stock generated based on the company's net income. EPS is normally based on the weighted average number of shares outstanding for an entire year.