Financial Statement Basics

Income Statement

A report card showing how much was earned and spent over a period — subtracting costs step by step from revenue to show how profit is formed.

In plain terms

The income statement is a "report card" for one quarter (or one year). Revenue (money earned) sits at the top, and costs are subtracted one by one as you go down. That is why it looks like a "staircase" — the further down you go, the closer you get to the money actually left over.

For example, starting with $100 in revenue and subtracting $60 in cost to make the goods leaves $40 in gross profit; subtracting $25 in SG&A such as wages and marketing leaves $15 in operating income; and finally subtracting $5 in interest and taxes leaves $10 in net income.

What it tells you

It shows step by step "what the company earns money from and where it spends it." In particular, seeing at which step money leaks out the most reveals the company's weak spots.

What really matters is not the single net income line but "the process by which profit is formed." Even with the same net income, profit earned from the core business (operating income) is entirely different from profit filled in by a one-time asset sale.

Formula

Revenue − Cost of Revenue = Gross Profit
Gross Profit − SG&A = Operating Income
Operating Income ± Non-operating Items − Taxes = Net Income

What high or low means

When revenue grows and the operating margin (operating income ÷ revenue) rises along with it, it is seen as growth where earning becomes more efficient as scale increases.

If revenue grows while operating income stays flat or falls, it is a sign that costs rise as much as sales, leaving little behind.

Caution

Looking only at net income at the bottom makes it easy to be misled. Net income mixes in one-time items unrelated to the core business (asset sales, litigation settlements) and tax effects, so operating income shows the core business's performance more honestly.

"Profit" is a number worked out under accounting rules, so it differs from the cash that actually landed in the bank account. Sales made on credit still count toward profit — which is why you need to look at the cash flow statement alongside it to see whether that profit is real cash.

There are also items like depreciation, where "no cash went out but it is recorded as an expense," which can make profit look worse — or better — than the actual cash situation.

Metrics to read alongside

Operating Margin

Operating income divided by revenue is the operating margin. It shows in a single number how efficient the "operating income step" of the income statement is, giving you a sense of the earning power of the core business.

Net Margin

Net income divided by revenue is the net margin. It shows how much of the revenue is finally left over, which helps in reading what the bottom line of the income statement means.

Cash Flow Statement

Looking at how much the "profit" on the income statement differs from the "cash" on the cash flow statement lets you check whether that profit actually reaches the bank account.

Revenue

Revenue is the top line (the starting point) of the income statement. Every profit step begins from this number, so viewing them together shows you where the report card starts.

Guides that cover this term

How to read the three financial statements

A US company’s financial statements come in three parts, and the three are linked. Where to find them in SEC filings, what order to read each one in, and where they commonly trip people up.

See it in real stocks

Search US stocks on Stocklore to see Income and other financial metrics alongside the sector benchmark.

REAL TEAM Atlassian Corporation FSLR First Solar, Inc.WFC Wells Fargo & Co.CMG Chipotle Mexican Grill, Inc.DIS The Walt Disney Company Search stocks →

Exactly how Stocklore computes this metric (formula, thresholds, SEC source) is on the methodology page.

This explanation is for information and reference only and is not a recommendation to buy or sell any security. Investment decisions and their consequences are your own.