Income Statements Explained: Definition and Examples

Income Statements Explained: Definition and Examples

Income statements allow you to see how much revenue a company generates—and how they spend it.

What is an income statement? 

One of three financial statements that every company uses to track their financial performance, the income statement shows the amount of sales, expenses, and profit flowing through a business over a period of time. This statement is sometimes called the Profit and Loss Statement, or “P&L” for short. 

You can do a simple analysis of income statements to see exactly what percentage of revenue is spent on making products versus what is spent on overhead, and what percentage is left over as profit. 

How to read an income statement

The income statement begins with revenue, which is referred to as the “top line,” and ends with net income, which is referred to as “the bottom line.”  The bottom line shows a company’s profitability after all its costs are accounted for. 

Apple’s 2018 income statement.

Income statements are divided into two main sections: above the line and below the line. Here’s what’s contained in each.

Above the line

Below the line

What does an income statement tell you about a company?  

The income statement’s purpose is to reflect profitability. By looking at three numbers on the income statement, you can learn several key things about a business: 

  1. Gross margin tells you if customers value the company’s product enough to pay more for it than what it costs to make.
  2. Operating income tells you if the management team is running the business efficiently.
  3. Net income tells you if a business is profitable over a period of time after all is said and done. 

To go a step further in your analysis, you can plug these numbers into financial ratios. Ratios help you understand different aspects of the business’s operations, and compare them to competitors. 

Income statement vs. balance sheet 

Although the income statement and the balance sheet both provide a snapshot of a company’s financials, the balance sheet shows this data as of a particular date, and the income statement reports income through a reporting period. Its heading will indicate that time period, which might read, “For the fiscal year ended September 20, 2020.” The two statements fulfill different purposes: the income statement shows income and expenses, and a balance sheet records assets, liabilities, and equity.

Income statement vs. cash flow 

While an income statement measures a company’s financial performance over time, it doesn’t actually tell you how much cash a business has on hand at a given moment. 

“Accounting practices are different from cashflow,” explains Elaine Paul, CFO of Amazon Studios and former CFO of Hulu, in Pareto Labs’ class on reading financial statements. “Revenue recognition, and when revenue can hit your top line as top-line revenue coming into the company, is different than when the cash may be hitting the coffers. 

“For example, if we were buying a show for, say, $10M, once we signed that deal and they delivered us the series on their books, they could recognize all $10M as revenue,” Paul says. “But our payment terms might’ve been to pay for that over a four or five-year license term. So our cash outflow would be over those four or five years, but the company from whom we could buy, it would be recognizing revenue on paper [on its income statement], right up front.”

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