The Three Most Important Parts Of The Income Statement

The income statement, also known as profit and loss statement (P&L), reports a specific company’s revenue, expenses, and net income over a period of time. It is a reflection of how much money the firm made during that period, a crucial information for investors as well as the management itself.

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The operating section of this report includes revenue and expenses, while the non-operating section comprises revenues and gains from non-primary business activities. The bottom line is the net income calculated after subtracting the expenses from revenue.

Here are its three most important parts:

Gross profit

This shows revenues, or sales of goods and services, minus the cost of goods or how much was spent producing or acquiring the sold items. It excludes other expenses yet it reflects correct product pricing or too much discounting. This number is best compared against those in previous reports in order to track trends. The data here is also used to come up with gross margins, or the ratio of gross profits to net sales.

Operating expenses

This section shows the cost of doing business, not including costs of production. It includes salaries, benefits, rent, advertising, utilities, other operating costs, and even depreciation. Some of these are fixed while others are variable.

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Net earnings

This is the bottom line, showing how much profit or loss the company achieved in that period. This figure needs to be compared with previous periods and against the budget. This data, too, calculates net margin, the ratio of net earnings to net sales.

A deeper look at the different sections offer potential explanations if the firm did not hit its revenue goals or exceeded its budget for expenses. The income statement, after all, gathers these important metrics and establishes the areas that require special attention.

Currently at the helm of TodoModo, Luis Manuel Ramirez is a Fortune 100 CEO with public company and board-level experience. Learn more about business on this page.