How to Read an Income Statement – Line by Line

The bottom line. That’s what we’re all concerned with. At the end of the day, what’s the final result? But what goes into that bottom line? Whether you want to understand how expenses affect your own earnings, or you’re analyzing a company to invest your money, one of the first things you want to understand is profitability. That’s what the income statement is designed to reveal.

The fundamental thing you need to know about income statements (or statements of earnings) is that they represent a period of time. The dates covered will be stated at the top of the report.

Now let’s take it line by line.

Sales Revenue
This is sometimes also called the top Line and is the amount the sold in a given period of time. It’s what the company brought in. Revenue may also be expressed in multiple lines to show the specific revenue for particular products or services.

Cost of Sales
This might be also called Cost of Goods Sold. Sales costs are expenses incurred to generate sales. For a manufacturer, these will be materials used in the fabrication of the products. For service industries, cost of sales will include salaries paid to employees directly providing the service.

Gross Profit
Gross Profit (or Loss) is the difference between Sales Revenue and Cost of Sales. A positive difference is profit. A negative difference is a loss and is usually shown in brackets, or sometimes in red ink. (Hence the sayings – ‘in the red’, and ‘in the black’.)

Operating Expenses
The next three items are all considered Operating Expenses. They represent payment for the necessary functions of getting your product into customers’ hands.

Note: Salaries will fall under the appropriate line time, such as Cost of Sales, G&A, or Sales, depending on the function of the employee.

G & A
General and administrative (G&A) are costs associated with running the company. These are your overhead costs and include things like rent on office space, supplies, and utilities.

Sales & Marketing
Sales & Marketing expenses are just that – costs associated with marketing and selling a product or service. Common expenses are advertising, signage, some types of packaging, and commissions paid.

R & D
Research & Development (R&D) expenses are investments in the future of the business. These may be costs associated with creating or developing new products or operational functions. As an indication of management’s value for innovation, changes in these numbers can speak volumes.

Operating Income
Operating Income is the amount left over after subtract all the operating expenses from Gross Profit. This is what the company makes from their business. It is in large part what the company has control over.

Interest
Interest expense is paid on on debt incurred to finance operations.

Income Before Taxes
Income Before Taxes is generally the amount on which the company will pay pay taxes.

Taxes
Taxes includes all types taxes paid or expected to be payable to all jurisdictions for income earned during the period.

Net Income From Continuing Operations
This is the income after taxes.

Non-recurring Events
Non-recurring events are one-time expenses. These are listed separately because they aren’t expected to have an impact on the continuing operations of the business. Payment for settling a lawsuit would be a non-recurring event.

Net Income
This figure is total revenue less total expenses. Again, if the difference is positive it is profit. If it’s negative it’s a loss. If no dividends are paid, this is the bottom line.

Dividends
If a company pays dividends to the shareholders, they are reported below Net Income.

Net Income Available to Shareholders
And here we are – the bottom line. After all expenses and dividend, this is the final net figure.

Income statements will vary from industry to industry and may be more or less detailed depending on the type of business and the company, but these are your basic items.

If you have any questions about an item on an Income Statement you’re reading, or where an expense should go on one you’re preparing, please ask!

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