How do you read an income statement?

At the very top of the statement, you will find revenue, also known as sales. This is the total amount of money brought in by the company's core operations before any costs are taken out. Think of it as your gross paycheck before taxes and deductions are removed.

As you read down the statement, you will see various expenses deducted from the revenue. The first is usually Cost of Goods Sold (COGS), which are the direct costs of producing the goods sold. Subtracting COGS from revenue gives you Gross Profit.

Next come Operating Expenses, which are the indirect costs of running the business, like rent, salaries, and marketing. Subtracting these from Gross Profit gives you Operating Income. Finally, you deduct things like interest and taxes.

The final number at the bottom of the statement is the Net Income, sometimes called net profit or net loss. The formula is simply $ext{Net Income} = ext{Total Revenue} - ext{Total Expenses}$. If this number is positive, the company made a profit. If it is negative, it operated at a loss.

A common mistake is thinking that 'Net Income' equals the cash a company has in the bank. Because most large businesses use accrual accounting, they record revenue when a sale is made, not necessarily when the cash is received. You can have a high net income but zero cash if all your customers bought on credit!