How to read an income statement?

An income statement, also known as profit and loss (P&L) statements, presents information on the financial results of a company’s business activities over a period of time. It summarizes all income and expenses over a given period, including the cumulative impact of revenue, gain, expense, and loss transactions. Income statements are often shared as quarterly/interim and annual reports, showing financial trends and comparisons over time. Here’s a closer look at primary terms in the income statement:

  • Revenue: The amount of money a business takes in during a reporting period
  • Expenses: The amount of money a business spends during a reporting period
  • Costs of goods sold (COGS): The cost of component parts of what it takes to make the products or services a business sells
  • Gross profit: Total revenue less COGS
  • Operating income: Gross profit less operating expenses
  • Income before taxes: Operating income less non-operating expenses
  • Net income: Income before taxes less taxes
  • Earnings per share (EPS): Division of net income by the total number of outstanding shares
  • Depreciation: The extent to which assets (for example, aging equipment) have lost value over time
  • EBITDA: Earnings before interest, depreciation, taxes, and amortization

When you read income statements, two methods commonly used to analyze a company's financial documents:

  • Vertical Analysis

Vertical analysis refers to the method of financial analysis where each line item is listed as a percentage of a base figure within the statement. This means line items on income statements are stated in percentages of gross sales, instead of in exact amounts of money, such as dollars.

  • Horizontal Analysis

Horizontal analysis reviews and compares changes in the dollar amounts in a company’s financial statements over multiple reporting periods. It’s frequently used in absolute comparisons, but can be used as percentages, too.

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