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Glossary

Income Statement

An income statement is a financial report that summarizes a company's revenues, expenses, and resulting profit or loss over a specific period, such as a quarter or year.

What Is an Income Statement?

An income statement is one of the main financial statements a company publishes. It summarizes the revenue a business earned over a period, such as a quarter or a year, and subtracts the costs and expenses incurred to generate that revenue. The bottom line shows whether the company made a profit or a loss during that period. It is also called a profit and loss statement, or P&L.

How It Is Structured

The statement reads from the top down. It begins with revenue, sometimes called sales or the top line. Next it subtracts cost of goods sold to arrive at gross profit. It then deducts operating expenses such as salaries, rent, marketing, and research spending, producing operating income. After interest and taxes are accounted for, the final line is net income.

In simplified form:

Net Income = Revenue - Total Expenses

Why It Matters to Investors

The income statement shows how profitable a company is and how that profitability changes over time. Investors compare figures across quarters and years to spot trends in sales growth, profit margins, and costs. Net income is the basis for earnings per share, a widely used measure that is often compared with share prices through the price-to-earnings ratio.

The statement has limits. It follows accounting rules, which include non-cash items such as depreciation, so it does not show the actual cash a company generated. For that, investors also review the cash flow statement and the balance sheet, which lists assets, liabilities, and equity at a single point in time.

Limitations to Keep in Mind

Companies may use different accounting methods, and management has some discretion over estimates, so comparing companies requires care. Results can also include one-time gains or losses that do not reflect ongoing operations. The notes that accompany the financial statements often explain how the numbers were prepared.

Updated October 15, 2026. For general education only; not financial, tax or legal advice.

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Related Terms

Revenue

Revenue is the total money a company earns from its core business activities, such as selling goods or services, before any expenses are subtracted.

Cost of Goods Sold (COGS)

Cost of goods sold is the total direct cost a company incurs to produce or purchase the goods it sold during a period, such as materials, labor, and manufacturing overhead.

Gross Profit

Gross profit is the amount of revenue a company keeps after subtracting the direct costs of producing the goods or services it sells, before operating expenses, interest, and taxes are deducted.

Operating Income

Operating income is the profit a company earns from its core business activities after paying operating costs, but before interest and income taxes are deducted.

Earnings Per Share (EPS)

Earnings per share is the portion of a company's profit allocated to each outstanding share of its common stock, calculated by dividing net income available to common shareholders by the weighted average number of shares outstanding.

Price-to-Earnings Ratio (P/E Ratio)

The price-to-earnings ratio compares a company's share price with its earnings per share, showing how much investors pay for each dollar of annual profit.

Cash Flow Statement

A cash flow statement is a financial report that summarizes the actual cash coming into and going out of a company over a set period, grouped into operating, investing, and financing activities.

Balance Sheet

A balance sheet is a financial statement that lists a company's assets, liabilities, and shareholders' equity at a specific point in time, showing what it owns and owes.