what is an income statement 
an income statement reveals a company s revenue expenses gains and losses during a particular period also known as the profit and loss p l statement or the statement of revenue and expense it provides valuable insights into a company s operations the efficiency of its management underperforming sectors and its performance relative to industry peers the income statement is one of the three important financial statements used for reporting a company s financial performance over a specific accounting period the other two key statements are the balance sheet and the cash flow statement mira norian investopediaunderstanding the income statementthe income statement is an integral part of the company performance reports that must be submitted to the u s securities and exchange commission sec while the balance sheet provides a snapshot of a company s financials as of a particular date the income statement reports income through a specific period usually a quarter or a year the period the income statement covers is indicated in its heading for example it could read year ended january 31 2024 which would be the company s fiscal year or three months ended march 31 2024 which means the first three months of the calendar year investopedia theresa chiechithe income statement focuses on four key items revenue expenses gains and losses it does not differentiate between cash and non cash receipts sales in cash vs sales on credit or cash vs non cash payments disbursements purchases in cash vs purchases on credit it starts with the details of sales and then works down to compute net income and eventually earnings per share eps essentially it gives an account of how the net revenue realized by the company gets transformed into net earnings profit or loss 1revenue and gainsthe following are covered in the income statement though its format may vary depending upon the local regulatory requirements the diversified scope of the business and the associated operating activities revenue realized through primary activities is often referred to as operating revenue for a company manufacturing a product or for a wholesaler distributor or retailer involved in the business of selling that product the revenue from primary activities refers to revenue achieved from the sale of the product similarly for a company or its franchisees in the business of offering services revenue from primary activities refers to the revenue or fees earned in exchange for offering those services revenue realized through secondary noncore business activities is often referred to as nonoperating recurring revenue this revenue is sourced from the earnings that are outside the purchase and sale of goods and services and may include income from interest earned on business capital parked in the bank rental income from business property income from strategic partnerships like royalty payment receipts or income from an advertisement display placed on business property also called other sundry income gains indicate the net money made from other activities like the sale of long term assets these include the net income realized from one time nonbusiness activities such as a company selling its old transportation van unused land or a subsidiary company revenue should not be confused with receipts payment is usually accounted for in the period when sales are made or services are delivered receipts are the cash received and are accounted for when the money is received a customer may take goods services from a company on sept 28 which will lead to the revenue accounted for in september the customer may be given a 30 day payment window due to his excellent credit and reputation allowing until oct 28 to make the payment which is when the receipts are accounted for expenses and lossesa business s cost to continue operating and turning a profit is known as an expense some of these expenses may be written off on a tax return if they meet internal revenue service irs guidelines these are all expenses incurred for earning the average operating revenue linked to the primary activity of the business they include the cost of goods sold cogs selling general and administrative sg a expenses depreciation or amortization and research and development r d expenses typical items that make up the list are employee wages sales commissions and expenses for utilities such as electricity and transportation these are all expenses linked to noncore business activities like interest paid on loan money these are all expenses that go toward a loss making sale of long term assets one time or any other unusual costs or expenses toward lawsuits while primary revenue and expenses offer insights into how well the company s core business is performing the secondary revenue and fees account for the company s involvement and expertise in managing ad hoc non core activities compared with the income from the sale of manufactured goods a substantially high interest income from money lying in the bank indicates that the business may not be using the available cash to its full potential by expanding the production capacity or that it is facing challenges in increasing its market share amid competition recurring rental income gained by hosting billboards at the company factory along a highway indicates that management is capitalizing upon the available resources and assets for additional profitability income statement structuremathematically net income is calculated based on the following to understand the above formula with some real numbers let s assume that a fictitious sports merchandise business which additionally provides training is reporting its income statement for a recent hypothetical quarter investopedia sabrina jiangthe company received 25 800 from the sale of sports goods and 5 000 from training services for a total of 30 800 in revenue however that money didn t stay in its pocket generating that revenue cost it a total of 10 650 major expenses included procurement costs rent and wages the company also realized net gains of 2 000 from the sale of an old van and incurred losses worth 800 for settling a dispute raised by a consumer if you subtract all the outgoings from the money the company received you are left with 21 350 that s the company s net income for the given quarter the above example is the simplest form of income statement that any standard business can generate it is called the single step income statement as it is based on a simple calculation that sums up revenue and gains and subtracts expenses and losses however real world companies often operate on a global scale have diversified business segments offering a mix of products and services and frequently get involved in mergers acquisitions and strategic partnerships such a wide array of operations diversified set of expenses various business activities and the need for reporting in a standard format per regulatory compliance leads to multiple and complex accounting entries in the income statement listed companies follow the multiple step income statement which segregates the operating revenue operating expenses and gains from the nonoperating revenue nonoperating expenses and losses and offers many more details essentially the different measures of profitability in a multiple step income statement are reported at four different levels in a business s operations gross operating pretax and after tax as we ll see shortly in the following example this segregation helps in identifying how the income and profitability are moving changing from one level to the other for instance high gross profit but lower operating income indicates higher expenses while higher pretax profit and lower post tax profit indicate loss of earnings to taxes and other one time unusual expenses let s look at an example based on the annual income statements of two large publicly listed multinational companies from different sectors technology microsoft and retail walmart reading income statementsthe focus in this standard format is to calculate the profit income at each subhead of revenue and operating expenses and then account for mandatory taxes interest and other nonrecurring one time events to arrive at the net income that applies to common stock though calculations involve simple additions and subtractions the order in which the various entries appear in the statement and their relationships often get repetitive and complicated let s take a deep dive into these numbers for a better understanding the first section titled revenue indicates that microsoft s gross annual profit or gross margin for the fiscal year ending june 30 2023 was 146 05 billion it was arrived at by deducting the cost of revenue 65 86 billion from the total revenue 211 92 billion realized by the technology giant during this fiscal year just over 30 of microsoft s total sales went toward costs for revenue generation 2walmart s revenues cost a lot more money to generate in its fiscal year ended jan 31 2024 the retail giant s cost of sales represented about 76 of revenues 490 14 billion 648 13 billion this indicates that walmart incurred much higher costs than microsoft to generate equivalent sales 3the next section called operating expenses again takes into account microsoft s cost of revenue 65 86 billion and total revenue 211 92 billion for the fiscal year to arrive at the reported figures microsoft spent 27 2 billion on r d and 30 33 billion on sg a total operating expenses are computed by summing all these figures 65 86 billion 27 2 billion 30 33 billion 123 39 billion 2reducing total operating expenses from total revenue leads to operating income or loss of 88 52 billion 211 915 billion 123 392 billion 2 this figure represents the earnings before interest and taxes ebit for its core business activities and is again used later to derive the net income a comparison of the line items indicates that walmart did not spend anything on r d and had higher sg a and total operating expenses than microsoft 3 its operating income for the period was 27 01 billion 648 125 billion 621 113 billion the next section titled income from continuing operations adds net other income or expenses like one time earnings interest linked expenses and applicable taxes to arrive at the net income 72 36 billion for microsoft which is nearly 80 higher than that of walmart 15 51 billion 23eps is computed by dividing the net income figure by the number of weighted average shares outstanding with 7 45 billion outstanding shares for microsoft its eps came to 9 72 per share 72 361 billion 7 446 billion 2 walmart on the other hand had a weighted average of 8 08 billion outstanding common shares during its fiscal year so its eps came to 1 92 per share 15 511 billion 8 08 billion 3microsoft had a lower cost for generating equivalent revenue higher net income from continuing operations and higher net income applicable to common shares compared with walmart uses of income statementsthough the primary purpose of an income statement is to convey details of profitability and business activities of the company to the stakeholders it also provides detailed insights into the company s internal activities for comparison across different businesses and sectors by understanding the income and expense components of the statement an investor can appreciate what makes a company profitable 4based on income statements management can make decisions like expanding to new geographies pushing sales expanding production capacity increasing the use of or the outright sale of assets or shutting down a department or product line competitors also may use them to gain insights about the success parameters of a company and focus areas such as lifting r d spending creditors may find income statements of limited use as they are more concerned about a company s future cash flows than its past profitability research analysts use the income statement to compare year on year and quarter on quarter performance one can infer for example whether a company s efforts at reducing the cost of sales helped it improve profits over time or whether management kept tabs on operating expenses without compromising on profitability 