Performance across a period
The income statement describes revenue, expenses, gains and losses for a period. It is also called a statement of operations or profit and loss statement. A typical nonfinancial company starts with revenue, subtracts cost of sales to obtain gross profit, then deducts operating expenses to arrive at operating income. Interest, nonoperating items and income tax lead to net income. Presentation varies by industry and framework.
Morrow's simplified year
| Item | Dollars |
|---|---|
| Revenue | 100,000 |
| Cost of sales | (55,000) |
| Gross profit | 45,000 |
| Operating expenses, including depreciation | (25,000) |
| Operating income | 20,000 |
| Interest expense | (2,000) |
| Pretax income | 18,000 |
| Income tax expense, assumed | (4,500) |
| Net income | 13,500 |
Parentheses indicate a deduction in this presentation. A data feed may instead store expenses as positive numbers, so inspect sign conventions before subtracting. Depreciation can sit inside cost of sales, other operating expenses or separate lines. Do not subtract it twice.
Gross margin is 45%. Operating margin is 20%. Net margin is 13.5%. Each answers a different question. A loan repayment and dividend are absent from the income statement because principal repayment reduces a liability and a dividend distributes equity; neither is an expense of generating the period's income.