Income Statement

An Income Statement is also known as a "profit and loss" statement for a given period of time, you may also see it referred to as the "statement of income".  As you can see below, the income statement is a record of all revenues and expenses during the reporting period and gives the company and investors alike the opportunity to see how profitable the company was.  

The reporting of heralded p/e ratio, or price to earnings ratio, is calculated by using the EPS number derived in the income statement.

The income statement figures you see below recognize revenues when they have been realized; therefore, the income statement does not reflect with the actual receipt or payment of cash.  If you are interested in the actual cash flows of a company, you should review the cash flow statement.

Example of Income Statement

Disney Income Statement

Components of the Income Statement

Let's review some of the key components of the income statement.

Total Revenue is a measure of the total value of sales of goods and services that were made by a company to its customer base.  Investors keep a close eye on this number as they can see the year over year growth of the business. 

The next line, Cost of Revenue measures the amount of expenses incurred for creating the goods and services that were sold to the companies customer base.  This can include material costs, labor,  equipment, and depreciation of capital expenses to name a few.

Gross Profits, or gross margins, are simply the difference between total revenue and the cost of acquiring that revenue.  Gross profits are used by the company to many of the other expenses that can be incurred such operating expenses or general administrative costs.

Operating Income is also known as earnings before Interest & taxes (EBIT) and is a measure of the companies earnings capacity when yout remove non-operating costs such as tax and interest.  Operating income is utilized by many wall street analysts as a more meaningful measure of profitability than the net income is. 

Net Income is the most looked at number on the income statement.  Net income is arrived at by taking total revenues and deducting it by the costs and expenses incurred to run the business.  Companies will pay dividends from their net income and apply the balance to the retained earnings account within shareholders equity on the balance sheet.  Net income is sometimes referred to as the "bottom line" as it is the net of costs and expenses.
Tim Ord
Ord Oracle

Tim Ord is a technical analyst and expert in the theories of chart analysis using price, volume, and a host of proprietary indicators as a guide...
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