They include the cost of goods sold (COGS); selling, general, and administrative (SG&A) expenses; depreciation or amortization; and research and development (R&D) expenses. Typical items that make up the list are employee wages, sales commissions, and expenses for utilities such as electricity and transportation. For a company manufacturing a product, or for a wholesaler, distributor, or retailer involved in the business of selling that product, the revenue from primary activities refers to revenue achieved from the sale of the product. Similarly, for a company (or its franchisees) in the business of offering services, revenue from primary activities refers to the revenue or fees earned in exchange for offering those services. When used in conjunction with the other financial statements, an income statement can give you a clear view of your cash flow.

• Net income—or loss—is what is left over after all revenues and expenses have been accounted for.
• Non-operating revenue comes from ancillary sources such as interest income from capital held in a bank or income from rental of business property.
• Just over 30% of Microsoft’s total sales went toward costs for revenue generation, while a similar figure for Walmart in its fiscal year 2021 was about 75% ($429 billion/$572.75 billion).
• This value is the company’s tax obligation on the income earned during the specified period.
• Additionally, comparing net income figures over multiple periods can provide insights into the company’s financial health and the effectiveness of its strategies.

A comprehensive analysis of an income statement involves understanding the income statement structure, breaking down expenses, analyzing revenue streams, and evaluating the enterprise’s profitability. Additionally, you will need to comprehend tax obligations, the role of depreciation and amortization, and how to decipher key income statement metrics. Comparing the income statement to other financial statements, like balance sheets and cash flow statements, will give you a holistic perspective on a company’s financial position.

How does the profit and loss statement relate to an income statement?

Revenue is all income generated by the sale of the business’ primary goods or services. Revenue may also be referred to as the “top line,” because it is the first line on the income statement. Another vital link between the two statements is the cost of goods sold (COGS) on the income statement. If a company purchases inventory, the balance sheet will reflect the change in inventory value while the income statement recognises the change in COGS, affecting the net income. These are all expenses linked to noncore business activities, like interest paid on loan money.

Competitors also may use them to gain insights about the success parameters of a company and focus areas such as lifting R&D spending. When deciding how you’d like to report your net income, it’s important to consider the pros and cons of both single-step and multi-step income statements. The income statement serves as a tool to understand the profitability of your business.

Income Statement: How to Read and Use It

Accurate records of expenses, revenues, and credits are required for tax purposes and can help keep you in compliance with tax regulations. A comparison of the line items indicates that Walmart did not spend anything on R&D and had higher SG&A and total operating expenses than Microsoft. These are all expenses that go toward a loss-making sale of long-term assets, one-time or any other unusual costs, or expenses toward lawsuits. the focus of an income statement is on Some of these expenses may be written off on a tax return if they meet Internal Revenue Service (IRS) guidelines. A customer may take goods/services from a company on Sept. 28, which will lead to the revenue accounted for in September. The customer may be given a 30-day payment window due to his excellent credit and reputation, allowing until Oct. 28 to make the payment, which is when the receipts are accounted for.

• Similarly, for a company (or its franchisees) in the business of offering services, revenue from primary activities refers to the revenue or fees earned in exchange for offering those services.
• If the net income is positive, it indicates that the company is earning more than it spends and is profitable.
• As these assets are used in the company’s operations, their value reduces over time, reflecting the wear and tear or obsolescence.
• When analyzing an income statement, it’s essential to understand the income before taxes.

The net income from the income statement flows into the balance sheet, affecting the retained earnings by either increasing it when the company makes a profit, or decreasing it in case of a loss. Calculating tax expenses involves applying the current applicable tax rate to the income before taxes. Keep in mind that tax regulations and rates change over time, so always reference up-to-date information. Operating revenue is realized through a business’ primary activity, such as selling its products. Non-operating revenue comes from ancillary sources such as interest income from capital held in a bank or income from rental of business property.

How can you interpret the company’s profitability from an income statement?

Additionally, comparing net income figures over multiple periods can provide insights into the company’s financial health and the effectiveness of its strategies. They may include interest expense from borrowed funds, one-time expenses such as losses from the sale of assets, and other costs unrelated to the primary business activities of the company. It presents a company’s revenues, expenses, and net income (or loss) over a specified period, providing insights into the company’s profitability and financial performance. By comprehending both income before taxes and tax expenses, you can gain a clear understanding of a company’s financial performance and its tax obligations. Remember to consistently monitor changes in tax regulations, as they may impact your analysis in the future.

One can infer, for example, whether a company’s efforts at reducing the cost of sales helped it improve profits over time, or whether management kept tabs on operating expenses without compromising on profitability. To summarize, understanding the breakdown of expenses on an income statement is crucial for analyzing a company’s financial health. Grasping the differences between COGS, operating expenses, and non-operating expenses enables you to identify the primary drivers of a company’s profitability and make informed decisions. Reducing total operating expenses from total revenue leads to operating income (or loss) of $69.92 billion ($168.09 billion – $98.18 billion).