Topic 3.6 · The Income Statement
The Income Statement
Reading and building an income statement, from revenue to net profit; profit margins and percent change; and projected income statements and personal budgets.
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Learning objectives
- 3.6.ADetermine and describe components of a business income statement.
- 3.6.BEvaluate the financial performance of a business using income statement information.
- 3.6.CExplain why and how businesses and consumers predict and plan for future income and expenses.
- 3.6.DDevelop an income statement or projected income statement for a business.
Objective statements © College Board, quoted from the Course and Exam Description.
The income statement compares a business's revenue to its costs over a period, such as a month, quarter or year, to find net profit or loss. It usually shows several periods side by side for comparison.
Walking down the statement
| Line | Calculation | Example (in $) |
|---|---|---|
| Revenue | Sales of goods and services | 500,000 |
| − Cost of goods sold (COGS) | Direct costs | (300,000) |
| = Gross profit | Revenue − COGS | 200,000 |
| − Operating expenses | Selling, general & administrative, and R&D | (120,000) |
| = Operating profit | Gross profit − operating expenses | 80,000 |
| − Interest expense | Cost of borrowing | (10,000) |
| = Pretax income |
Key terms
- Income statement
- Also called the profit and loss statement. It compares revenue to costs over a period to find net profit or loss.
- Revenue
- Income from a business's core activities, such as selling goods and services.
- Gross profit
- Revenue minus COGS.
- Operating profit
- Gross profit minus operating expenses. Equal to income before interest and taxes.
- Pretax income
- Operating profit minus interest expense.
- Net profit (bottom line)
- Pretax income minus taxes: the profit earned by owners for the period.
- Gross profit margin
- Gross profit ÷ revenue. Shows how well a business prices and manages direct costs.
- Operating profit margin
- Operating profit ÷ revenue. Shows how well a business sells, administers and controls operating expenses.
- Net profit margin
- Net profit ÷ revenue. Shows overall profitability, the share of revenue that flows to owners.
- Percent change
- (Current − Initial) ÷ Initial × 100.
- Projected income statement
- A forecast of revenue, costs and profit for a future period, used to plan and identify funding needs.
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