An income statement is a crucial financial document that shows how much profit or loss your company incurred during a period of time. It is especially helpful when you look at several income statements together to identify trends in different areas of the income statement. If you are going to be getting a loan from a bank or looking for investors, you are going to need to be familiar with an income statement. 

Revenue and Sales

An income statement starts with sales and revenue. Sales is the money your company has collected selling goods or services. It is what you make off of your primary product. Revenue, on the other hand, is any money you make off of interest, additional feel, or auxiliary services, like shipping or installation.  

Cost of Goods Sold /Cost of services

The next line down is your cost for producing that good or service and is normally labeled as either cost of goods sold (COGS) or cost of services (COS). It is everything that you had to pay to produce your product or service. For products, this is a little simpler. It is the cost of materials, the cost to manufacture, the cost to ship, etc. Everything from materials to the product being in your customers’ hands. If you are a service or consultation business, this can be a little more complicated. It usually includes the salary of the people who are working directly on fulfilling your service obligations to the client. For example, your account managers’ and copy writers’ salaries would be in COS, but your HR manager would not be. 

There are certainly some grey areas, but think of it this way: if you stopped having that item or role in your business, would your customers or clients notice right away? Are they directly involved with the end product? If yes, it should go to COGS/COS. If not, it will go further down on the income statement. 

Gross Margin

Once you subtract COGS/COS from your sales and revenue you are left with your first total line: Gross Margin. Gross margins is defined as your income minus COGS/COS. 

Sales 1,000,000
Revenue 50,000
Cost of Goods Sold 650,000
Gross Margin 4,000,000

*note: there are rarely indications of positive and negative numbers on an income statement. Instead, look for the word cost or expense for the line item to see if it should be subtracted from a total. 

 

Operating Expenses

The next part of your income statement deals with the other costs that come from running a business, otherwise known as your operating expenses or administrative expenses. These can include the salaries of any employees not included in COGS/COS, rent on your building, research, product development, and anything else you can’t bill directly to the customer. Once you subtract that from your gross margin, you are left with total operating income or income before taxes. 

Sales 1,000,000
Revenue 50,000
Cost of Goods Sold 650,000
Gross Margin 400,000
Operating Expenses 200,000
Total Operating Income 200,000

 

Tax Expense

The last section is your Income tax expense. This is basically how much you expect to owe in taxes based on your income. Once you subtract that, you have your total net income, indicated by a double line beneath the total. 

Sales 1,000,000
Revenue 50,000
Cost of Goods Sold 650,000
Gross Margin 400,000
Operating Expenses 200,000
Total Operating Income 200,000
Income Tax Expense 50,000
Net Income 150,000

 

Net Income

Net income is also often referred to as net profit. It is what your company has actually made for the period you are reporting on. 

An income statement provides a snapshot of the health of a company in terms of what it’s bringing in through sales and revenue versus what it is costing the company to run. It can help banks and investors see how efficiently a company is running and if they are likely to grow, especially when viewed next to previous periods’ income statements.

2018 2017 2016
Sales 1,000,000 900,000 900,000
Revenue 50,000 50,000 30,000
Cost of Goods Sold 650,000 550,000 550,000
Gross Margin 400,000 400,000 380,000
Operating Expenses 200,000 150,000 150,000
Total Operating Income 200,000 250,000 230,000
Income Tax Expense 50,000 46,000 46,000
Net Income 150,000 204,000 184,000

 

The example we’ve included is a simple income statement. For larger companies, the major line items we’ve included can be broken down further, but they are usually included as totals or headings. Even with more complex income statements, this should give you a good idea of how to interpret any additional data they include. If you have any other questions about income statements, let us know! For information on other important financial documents, visit our financial resources section

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