Income statement

What it means

An income statement is one of the three core financial statements, and it shows a company's revenue, expenses, and profit over a period such as a quarter or a year. It starts with revenue at the top, subtracts the cost of goods sold to get gross profit, then subtracts operating expenses to reach operating income, and finally accounts for interest and taxes to arrive at net income, the famous bottom line.

Public companies publish income statements in their quarterly 10-Q and annual 10-K filings, and the headline figures, revenue and earnings per share, are what markets react to each earnings season. Analysts also watch the margins between the lines: gross margin reveals pricing power, while operating margin shows how efficiently the business is run.

One caveat is that the income statement uses accrual accounting, which records revenue when earned and expenses when incurred, not when cash changes hands. A company can therefore report a profit while its cash position deteriorates, which is why careful investors always read the income statement alongside the cash flow statement.

An example

For illustration, a company reports $1 billion in revenue and $900 million in total expenses, leaving $100 million in net income. But if customers have not paid their invoices yet, the company's bank balance may have barely moved.

Related terms

Revenue, Earnings per share (EPS), 10-K, Cash flow statement