Income Statement - Stock Trading Glossary

The income statement is one of the three core financial statements that reveals a company's revenues and expenses over a specific time period, indicating whether it has incurred profits or losses. It starts with listing revenue, often called the "top-line," and then subtracts all key expenses to calculate profit or loss, referred to as the "bottom-line," near the end. Publicly traded companies issue income statements in their quarterly and annual reports. Investors and analysts rely on income statements to assess a company's business performance, including its ability to manage expenses and generate profits. The income statement is also known as the profit and loss statement, P&L statement, earnings statement, statement of operations, or other similar terms.

The income statement displays how a company's revenue and expenses result in profits or losses, but it involves multiple line items. The income statement breaks down each revenue and expense line item that contributes to the bottom line. Additionally, it may contain non-operating gains and losses, which are gains or losses unrelated to the core business, such as selling assets or lawsuit costs.

Despite appearing complex, income statements are based on simple addition and subtraction calculations.

The income statement's top section depicts the conversion of revenue into gross profit, and its main components include:

Revenue: The total revenue generated from the company's core business operations, such as selling products or services.

Cost of revenue: The expenses incurred in producing or selling the goods directly related to the revenue.

Gross profit: It's the difference between revenue and cost of revenue and is also referred to as gross income.

Though not listed on the income statement, the gross margin can be calculated by dividing gross profit by revenue. The gross margin is an essential metric for analysts, particularly for companies with a high cost of revenue.

It's crucial to note that publicly traded US companies use accrual-based accounting, where revenue or expenses are recognized when incurred, irrespective of cash inflows or outflows. For instance, a company may record revenue when goods are delivered to customers, even if payment is made later. To assess the actual cash inflows and outflows, investors need to examine the cash flow statement.

Here's a brief summary of the three core financial statements:

Income statement: Displays how much of the company's revenue remains as profits after subtracting all expenses and costs.

Balance sheet: Illustrates everything the company possesses and owes. The assets owned by the company are listed, while its liabilities are what the company owes. The difference between the assets and liabilities is equity or book value.

Cash flow statement: Depicts the company's cash inflows and outflows. It demonstrates the amount of cash the company receives from various sources and the amount of cash it disburses for various expenses.