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Income Statement – Definition, Explanation and Examples


The Income Statement is one of a company’s core financial statements that shows their profit and lossProfit and Loss Statement (P&L)A profit and loss statement (P&L), or income statement or statement of operations, is a financial report that provides a summary of a company’s revenues, expenses, and profits/losses over a given period of time.  The P&L statement shows a company’s ability to generate sales, manage expenses, and create profits. over a period of time.  The profit or loss is determined by taking all revenues and subtracting all expenses from both operating and non-operating activities.

The income statement is one of three statementsThree Financial StatementsThe three financial statements are the income statement, the balance sheet, and the statement of cash flows. These three core statements are intricately used in both corporate finance (including financial modelingWhat is Financial ModelingFinancial modeling is performed in Excel to forecast a company’s financial performance. Overview of what is financial modeling, how & why to build a model.) and accounting. The statement displays the company’s revenue, costs, gross profit, selling and administrative expenses, other expenses and income, taxes paid, and net profit, in a coherent and logical manner.

income statement diagram

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The statement is divided into time periods that logically follow the company’s operations. The most common periodic division is monthly (for internal reporting), although certain companies may use a thirteen-period cycle. These periodic statements are aggregated into total values for quarterly and annual results.

This statement is a great place to begin a financial modelWhat is Financial ModelingFinancial modeling is performed in Excel to forecast a company’s financial performance. Overview of what is financial modeling, how & why to build a model., as it requires the least amount of information from the balance sheet and cash flow statement. Thus, in terms of information, the income statement is a predecessor to the other two core statements.


Simple income statement from a financial model


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Components of an Income Statement

The income statement may have minor variations between different companies, as expenses and income will be dependent on the type of operations or business conducted. However, there are several generic line items that are commonly seen in any income statement.

The most common income statement items include:


Sales RevenueSales RevenueSales revenue is the income received by a company from its sales of goods or the provision of services. In accounting, the terms “sales” and “revenue” can be, and often are, used interchangeably, to mean the same thing. Revenue does not necessarily mean cash received. is the company’s revenue from sales or services, displayed at the very top of the statement. This value will be the gross of the costs associated with creating the goods sold or in providing services. Some companies have multiple revenue streamsRevenue StreamsRevenue Streams are the various sources from which a business earns money from the sale of goods or provision of services. The types of revenue that a business records on its accounts depend on the types of activities carried out by the business. See categories and examples that add to a total revenue line.


Cost of Goods Sold (COGS)

Cost of Goods Sold (COGS) is a line-item that aggregates the direct costs associated with selling products to generate revenue.  This line item can also be called Cost of Sales if the company is a service business. Direct costs can include labor, parts, materials, and an allocation of other expenses such as depreciation (see an explanation of depreciation below).


Gross Profit

Gross ProfitGross ProfitGross profit is the direct profit left over after deducting the cost of goods sold, or “cost of sales”, from sales revenue. It’s used to calculate the gross profit margin and is the initial profit figure listed on a company’s income statement. Gross profit is calculated before operating profit or net profit. Gross profit is calculated by subtracting Cost of Goods Sold (or Cost of Sales) from Sales Revenue.


Marketing, Advertising, and Promotion Expenses

Most businesses have some expenses related to selling goods and/or services. Marketing, advertising, and promotion expenses are often grouped together as they are similar expenses, all related to selling.


General and Administrative (G&A) Expenses

SG&A ExpensesSG&ASG&A includes all non-production expenses incurred by a company in any given period. This includes expenses such as rent, advertising, marketing, accounting, litigation, travel, meals, management salaries, bonuses, and more. On occasion, it may also include depreciation expense include the selling, general, and the administrative section that contains all other indirect costs associated with running the business. This includes salaries and wages, rent and office expenses, insurance, travel expenses, and sometimes depreciation and amortization, along with other operational expenses. Entities may, however, elect to separate out depreciation and amortization in its own section.



EBITDAEBITDAEBITDA or Earnings Before Interest, Tax, Depreciation, Amortization is a company’s profits before any of these net deductions are made. EBITDA focuses on the operating decisions of a business because it looks at the business’ profitability from core operations before the impact of capital structure. Formula, examples, while not present in all income statements, stands for Earnings before Interest, Tax, Depreciation, and Amortization. It is calculated by subtracting SG&A expenses (excluding amortization and depreciation) from gross profit.


Depreciation & Amortization Expense

DepreciationDepreciation ExpenseDepreciation expense is used to reduce the value of plant, property, and equipment to match its use, and wear and tear, over time. Depreciation expense is used to better reflect the expense and value of a long-term asset as it relates to the revenue it generates. and amortization are non-cashNon-Cash ExpensesNon cash expenses appear on an income statement because accounting principles require them to be recorded despite not actually being paid for with cash.  expenses that are created by accountants to spread out the cost of capital assets such as Property, Plant, and Equipment (PP&EPP&E (Property, Plant and Equipment)PP&E (Property, Plant, and Equipment) is one of the core non-current assets found on the balance sheet. PP&E is impacted by Capex, Depreciation, and Acquisitions/Dispositions of fixed assets. These assets play a key part in the financial planning and analysis of a company’s operations and future expenditures).


Operating Income (or EBIT)

Operating Income represents what’s earned from regular business operations. In other words, it’s the profit before any non-operating income, non-operating expenses, interest, or taxes are subtracted from revenues. EBIT EBIT GuideEBIT stands for Earnings Before Interest and Taxes and is one of the last subtotals in the income statement before net income. EBIT is also sometimes referred to as operating income and is called this because it’s found by deducting all operating expenses (production and non-production costs) from sales revenue.is a term commonly used in finance and stands for Earnings Before Interest and Taxes.



Interest ExpenseInterest ExpenseInterest expense arises out of a company that finances through debt or capital leases. Interest is found in the income statement, but can also be calculated through the debt schedule. The schedule should outline all the major pieces of debt a company has on its balance sheet, and calculate interest by multiplying the. It is common for companies to split out interest expense and interest income as a separate line item in the income statement. This is done in order to reconcile the difference between EBIT and EBT. Interest expense is determined by the debt schedule.Debt ScheduleA debt schedule lays out all of the debt a business has in a schedule based on its maturity and interest rate. In financial modeling, interest expense flows


Other Expenses

Businesses often have other expenses that are unique to their industry. Other expenses may include things such as fulfillment, technology, research and developmentResearch and Development (R&D)Research and Development (R&D) is a process by which a company obtains new knowledge and uses it to improve existing products and introduce new ones to its operations. R&D is a systematic investigation with the objective of introducing innovations to the company’s current product offerings. (R&D), stock-based compensationStock Based CompensationStock Based Compensation (also called Share-Based Compensation or Equity Compensation) is a way of paying employees and directors of a company with shares of ownership in the business. It is typically used to motivate employees beyond their regular cash-based compensation and to align their interests with those of the company. (SBC), impairment chargesImpairmentThe impairment of a fixed asset can be described as an abrupt decrease in fair value due to physical damage, changes in existing laws creating a permanent decrease, obsolescence of technology, etc. In case of a fixed-asset impairment, the company needs to decrease its book value, gains/losses on the sale of investments, foreign exchange impacts, and many other expenses that are industry or company-specific.


EBT (Pre-Tax Income)

EBTEarnings Before Tax (EBT)Earnings Before Tax (EBT), is found by deducting all relevant operating expenses and interest expense from sales revenue. Earnings Before Tax is used for analyzing the profitability of a company without the impact of its tax regime.  This makes companies in different states or countries more easily comparable stands for Earnings Before Tax, also known as pre-tax income, and is found by subtracting interest expense from Operating Income. This is the final subtotal before arriving at net income.


Income Taxes

Income TaxesAccounting For Income TaxesIncome taxes and its accounting is a key area of corporate finance. Having a conceptual understanding of accounting for income taxes enables a company to to maintain financial flexibility. Tax is an intricate field to navigate and often confuses even the most skilled financial analysts. refer to the relevant taxes charged on pre-tax income.  The total tax expense can consist of both current taxes and future taxes.


Net Income

Net IncomeNet IncomeNet Income is a key line item, not only in the income statement, but in all three core financial statements. While it is arrived at through the income statement, the net profit is also used in both the balance sheet and the cash flow statement. is calculated by deducting income taxes from pre-tax income. This is the amount that flows into retained earnings on the balance sheet, after deductions for any dividends.


A Real Example of an Income Statement

Below is an example of Amazon’s consolidated statement of operations, or income statement, for the years ended December 31, 2015 – 2017. Take a look at the P&L and then read a break down of it below.


Example of a real income statementSource: amazon.com


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Starting at the top we see that Amazon has two different revenue streams – products and services – which combine to form total revenue.

There is no gross profit subtotal, as the cost of sales is grouped with all other expenses, which include fulfillment, marketing, technology, content, general and administration (G&A), and other expenses.

After deducting all the above expenses we finally arrive at the first subtotal on the income statement, Operating Income (also known as EBIT or Earnings Before Interest and Taxes).

Everything below Operating Income is not related to the ongoing operation of the business – such as non-operating expenses, provision for income taxes (i.e., future taxes), and equity-method investment activity (profits or losses from minority investments), net of tax.

Finally, we arrive at the net income (or net loss), which is then divided by the weighted average shares outstandingWeighted Average Shares OutstandingWeighted average shares outstanding refers to the number of shares of a company calculated after adjusting for changes in the share capital over a reporting period. The number of weighted average shares outstanding is used in calculating metrics such as Earnings per Share (EPS) on a company’s financial statements to determine the Earnings Per ShareEarnings Per Share (EPS)Earnings per share (EPS) is a key metric used to determine the common shareholder’s portion of the company’s profit. EPS measures each common share’s profit (EPS).


How to Build an Income Statement in a Financial Model

After preparing the skeleton of an income statement as such, it can then be integrated into a proper financial modelTypes of Financial ModelsThe most common types of financial models include: 3 statement model, DCF model, M&A model, LBO model, budget model. Discover the top 10 types to forecast future performance.


Income Statement in a Financial Model


Step 1

First, input historical data for any available time periods into the income statement template in ExcelExcel ResourcesLearn Excel online with 100’s of free Excel tutorials, resources, guides & cheat sheets! CFI’s resources are the best way to learn Excel on your own terms.. Format historical data input using a specific format in order to be able to differentiate between hardcoded data and calculated data. As a reminder, a common method of formattingFinancial Model FormattingFinancial model formatting is a science all on its own. By formatting a financial model properly, the analyst maintains consistency, clarity and efficiency. such data is to color any hardcoded input in blue, while coloring calculated data or linking data in black. Doing so enables the user and reader to know where changes in inputs can be made, and to know which cells contain formulae and, as such, should not be changed or tampered with. Regardless of the formatting method chosen, however, remember to maintain consistent usage in order to avoid confusion.


Step 2

Next, analyze the trend in the available historical data to create drivers and assumptions for future forecasting. For example, analyze the trend in sales to forecast sales growth, analyzing the COGS as a percentage of sales to forecast future COGS. Learn more about forecasting methodsForecasting MethodsTop Forecasting Methods. In this article, we will explain four types of revenue forecasting methods that financial analysts use to predict future revenues..


Step 3

Finally, using the drivers and assumptions prepared in the previous step, forecast future valuesForecastingForecasting refers to the practice of predicting what will happen in the future by taking into consideration events in the past and present. Basically, it is a decision-making tool that helps businesses cope with the impact of the future’s uncertainty by examining historical data and trends. for all the line items within the income statement. Forecast specific line items, and use these to calculate subtotals. For example, for future gross profit, it is better to forecast COGS and revenueRevenueRevenue is the value of all sales of goods and services recognized by a company in a period. Revenue (also referred to as Sales or Income) forms the beginning of a company’s Income Statement and is often considered the “Top Line” of a business. and subtract them from each other, rather than to forecast future gross profit directly.


Income Statement Template

Please download CFI’s free income statement template to produce a year over year income statement with your own data.


Download example income statement


This template is from CFI’s Financial Analysis Fundamentals Course.


What are Common Drivers for Each Income Statement Item?

Line Item Driver or Assumption
Sales Revenue Selected growth percentage, pegged growth percentage based on index (such as GDP)
Cost of Goods Sold Percentage of sales, Fixed dollar value
SG&A Percentage of sales, fixed amount, trend, fixed dollar value
Depreciation and Amortization Depreciation Schedule
Interest Expense Debt Schedule
Income Tax Percentage of pre-tax income (effective tax rate)

While these drivers are commonly used, they are just general guidelines. There are situations where intuition must be exercised to determine the proper driver or assumption to use. For example, a specific entity may have zero revenue. As such, the percentage of sales driver cannot be used for COGS. Instead, an analyst may have to rely on examining the past trend of COGS to determine assumptions for forecasting COGS into the future.

The core statements used in financial modeling are the same core statements used in accounting. There are three: the Income Statement, the Balance SheetBalance SheetThe balance sheet is one of the three fundamental financial statements. These statements are key to both financial modeling and accounting. The balance sheet displays the company’s total assets, and how these assets are financed, through either debt or equity. Assets = Liabilities + Equity, and the Cash Flow StatementCash Flow Statement​A Cash Flow Statement (officially called the Statement of Cash Flows) contains information on how much cash a company has generated and used during a given period. It contains 3 sections: cash from operations, cash from investing and cash from financing.. In a financial modelTypes of Financial ModelsThe most common types of financial models include: 3 statement model, DCF model, M&A model, LBO model, budget model. Discover the top 10 types, each of these statements will impact the values of the other statements.


Income Statement Video Explanation

Below is a video explanation of how the income statement works, the various items that make it up, and why it matters so much to investors and company management teams.



We hope this video has helped you understand what many people consider to be the most important financial statement in accounting!


Additional Resources

To dive deeper into creating each of these statements for a financial model, check out the free CFI resources provided below which examine each of the core financial statements in detail:

  • Balance SheetBalance SheetThe balance sheet is one of the three fundamental financial statements. These statements are key to both financial modeling and accounting. The balance sheet displays the company’s total assets, and how these assets are financed, through either debt or equity. Assets = Liabilities + Equity
  • Cash Flow StatementCash Flow Statement​A Cash Flow Statement (officially called the Statement of Cash Flows) contains information on how much cash a company has generated and used during a given period. It contains 3 sections: cash from operations, cash from investing and cash from financing.
  • Forecasting the Income StatementProjecting Income Statement Line ItemsWe discuss the different methods of projecting income statement line items. Projecting income statement line items begins with sales revenue, then cost
  • Types of Financial AnalysisTypes of Financial AnalysisFinancial analysis involves using financial data to assess a company’s performance and make recommendations about how it can improve going forward. Financial Analysts primarily carry out their work in Excel, using a spreadsheet to analyze historical data and make projections Types of Financial Analysis




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