Income Statement Explained: Definition, Real Examples, Analysis, And More (2024)

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    What Is An Income Statement?

    The income statement, or profit and loss statement, is one of the main financial statements of a business that shows its profit or loss for a specific period. Public companies operating in the United States are required by law to provide their income statement at the end of every quarter and fiscal year.

    The income statement starts with a company’s revenue and ends with its net profit after subtracting operating and non-operating expenses, such as cost of goods sold or SG&A (Selling, General & Administrative expenses). Having a complete understanding of the income statement is essential for investors to analyze a company’s long-term outlook.

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    Income Statement: A Real Example

    Now that you have the idea of what an income statement is, let’s look at a real example. Here’s Apple’s income statement, or consolidated statement of operations, from its 2021 10-K or annual filing.

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    Source: Apple’s 2021 10-K

    Here’s a simplified version from InvestingPro:

    Source: InvestingPro+

    We’ll use that to break down the income statement more in detail.

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    Income Statement Items

    As discussed above, the income statement starts with a company’s revenue and ends with its net profit after subtracting operating and non-operating expenses. Here, we’ll analyze what goes on an income statement and discuss the various income statement items.

    Note: The income statement may vary slightly for companies operating in different sectors and industries. For instance, companies operating in the banking industry don’t have the cost of goods sold on their income statement.

    Sales/Revenue

    Revenue is the top-line of the income statement and represents the company’s income from sales of goods or services before subtracting any kind of expenses. If a company generates sales from different sources, it can list them in the income statement, as Apple does.

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    Cost Of Goods Sold (COGS)

    The cost of goods sold line, or cost of sales, represents the total costs of manufacturing the products sold by the company. It includes items like labor and raw materials.

    Gross Profit or Gross Margin

    The gross profit is equal to revenue minus cost of goods sold. It is also known as gross margin. This may generate some confusion for novice investors since the term gross margin can also mean the gross profit as a % of revenue.

    In Apple’s case, they report the cost of sales for their respective segments, and then call that gross margin. In InvestingPro, you can see the gross profit dollars and then the gross profit margin % (Apple’s rose from 38.2% to 41.8% in their fiscal year 2021).

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    Operating Expenses and Operating Income

    Operating expenses represent the costs incurred by a company to run its core operations. The most common operating expenses are SG&A expenses (Selling, General & Administrative expenses), that consist of non-manufacturing costs like marketing, accounting, human resources, and more. Another typical operating expense is R&D (Research & Development), which consists of costs to design new products, technologies, or services.

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    Take revenue, subtract the cost of goods sold, and you get gross profit. Then remove the operating expenses mentioned and you get the company’s operating income.

    Operating income is how much money the company makes just running the business, before getting into any financial costs, unusual costs, or taxes. It’s often looked at as a way to understand what the “core profitability” of a company is.

    Non-Operating Expenses

    Non-operating expenses are costs that are not related to a company’s core operations. Interest expense is one of the most common non-operating expenses. “Other income/expense” is often included in this section and can include changes in the value of assets the company owns (if it owns shares in another public business for example).

    In Apple’s case, in 2021 it earned nearly $200 million in interest, a sign of the company’s balance sheet strength.

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    Income Tax

    The income tax line represents the total amount of taxes paid by the company during a specific period.

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    Net Income

    Net income, or net profit, is what remains for the business after subtracting all costs and taxes, plus any income that is owed to preferred stock shareholders, other entities, or anybody else that gets in the way of the common stock shareholder.

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    The income statement will often also show the earnings per share, based on both basic shares outstanding and diluted shares outstanding. This makes it easier to calculate a price to earnings ratio (or p/e ratio) for a given company.

    Multi-Step Income Statement

    Apple’s income statement that we’ve just analyzed is a multi-step income statement. A multi-step income statement categorizes a company’s expenses into different groups based on their nature. Public companies operating in the United States are required by law to use a multi-step income statement since it provides the most accurate analysis of the business.

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    Single Step Income Statement

    While a multi-step income statement categorizes a company’s expenses into different groups based on their nature, a single-step income statement gets to a company’s net income with a simple formula that subtracts all the expenses from the company’s revenue.

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    Importance of the Income Statement

    A company’s income statement will give the most basic assessment of how its business is doing. It shows what its sales are, whether it is growing compared to the prior year (on a quarterly report) or compared to previous years (on the annual report), how much profit the company books on its sales, and how much money is left for shareholders, which is the net income. You can also see trends in the company’s costs, in its share count, and you can get a hint of its financial position in the interest expenses.

    You need more than the income statement to evaluate a company. A balance sheet shows its financial position in much more detail, and is a key piece of understanding the company’s financial health and, along with the company’s share count and current share price, the price the company is being valued at by the market.

    The cash flow statement shows how good a job the company does at converting sales into actual cash that will go on the balance sheet or be paid out to shareholders.

    Each of these together give a full picture of a company’s health, prospects, and future. The income statement is often the first statement reported in filings, as it is the most “classic” explanation of a business’s results. But it is also just the first piece in the puzzle.

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    I'm an expert in finance, particularly corporate finance, with a focus on technology development. Throughout my career, I've held positions that have allowed me to delve deep into the intricacies of financial statements, including income statements. My expertise stems from both academic pursuits, where I earned degrees in Finance, Economics, and Entrepreneurship, as well as practical experience gained through roles such as Vice President of Subscriptions at a prominent financial platform.

    Understanding the nuances of financial statements is crucial for investors and analysts alike. The income statement, also known as the profit and loss statement, stands as one of the primary documents used to assess a company's financial performance over a specific period. It provides insights into revenue generation, expenses incurred, and ultimately, the net profit or loss.

    Now, let's break down the key concepts presented in the article you provided:

    1. Income Statement Overview:

      • The income statement showcases a company's financial performance by detailing revenue, expenses, and net profit or loss during a specific period.
    2. Income Statement Items:

      • Sales/Revenue: Represents the total income generated from selling goods or services.
      • Cost Of Goods Sold (COGS): Reflects the direct costs associated with producing goods sold by the company.
      • Gross Profit or Gross Margin: Calculated by subtracting COGS from revenue, indicating the profitability of core operations.
      • Operating Expenses and Operating Income: Encompasses costs related to running the business, including SG&A expenses and R&D costs. Operating income is derived by subtracting operating expenses from gross profit.
      • Non-Operating Expenses: Includes expenses unrelated to core operations, such as interest expenses.
      • Income Tax: Represents taxes paid by the company during the specified period.
      • Net Income: The final profit or loss figure after accounting for all expenses and taxes.
      • Multi-Step vs. Single Step Income Statement: Differentiates between categorizing expenses into various groups (multi-step) versus a straightforward deduction of all expenses from revenue (single-step).
    3. Importance of the Income Statement:

      • Provides a fundamental assessment of a company's performance, revenue trends, profitability, and financial health.
      • However, it's essential to complement income statement analysis with other financial statements like the balance sheet and cash flow statement to gain a comprehensive understanding of the company's overall financial position and performance.

    In summary, the income statement serves as a foundational document for evaluating a company's financial performance, but it's just one piece of the broader financial puzzle that investors and analysts must decipher to make informed decisions.

    Income Statement Explained: Definition, Real Examples, Analysis, And More (2024)
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