The Income Statement

Introduction

The income statement measures a company's profitability over a period. It runs from revenue at the top to net income at the bottom. This lesson walks through each line.

Revenue

Revenue (sales) is the money a company earns from selling goods or services. It's the top line — where everything begins.

Cost of Goods Sold and Gross Profit

Cost of goods sold (COGS) is the direct cost of producing what's sold.

Revenue - COGS = Gross profit

Gross profit shows how much is left after direct production costs.

Operating Expenses and Operating Profit

Operating expenses (OpEx) include selling, general, administrative, and R&D costs.

Gross profit - Operating expenses = Operating profit

Operating profit reflects profitability from the core business, before interest and tax.

Interest, Tax and Net Income

Operating profit - Interest - Tax = Net income

Net income is the famous "bottom line" — the true profit after everything.

Earnings per Share (EPS)

EPS = Net income ÷ shares outstanding. It converts total profit into a per-share figure, making it directly comparable to the share price.

Reading Quality

Watch for:

• Consistent gross margins (pricing power)
• Operating margins improving over time
• Net income driven by core operations, not one-offs

Real-World Example

A company earns $100M revenue, pays $60M in COGS (40% gross margin), $25M in OpEx, leaving $15M operating profit. After $3M interest and $4M tax, net income = $8M. With 4M shares, EPS = $2.00.

Summary

• Revenue → gross profit → operating profit → net income
• Gross profit = revenue − COGS
• Operating profit = profit from core business
• Net income is the bottom line after interest and tax
• EPS = net income ÷ shares, tying profit to price

Next Lesson

The other two statements: balance sheet and cash flow.