# Income Statement

> The income statement shows a company's revenue, costs and profit over a period. Learn each line from revenue to EPS, a worked example and what traders watch.

Source: https://learn.tradelabsai.com/fundamentals/income-statement/  
Track: Fundamental Analysis · Level: Intermediate · Updated: 2026-10-03  
Publisher: TradeLabs AI (https://tradelabsai.com). Education, not financial advice.  
Cite as: TradeLabs Learn, "Income Statement", https://learn.tradelabsai.com/fundamentals/income-statement/

The income statement, also called the profit and loss statement (P&L), shows how much a company earned and spent over a period, such as a quarter or a year. It starts with revenue at the top and subtracts costs step by step until it reaches net income, the "bottom line". Earnings per share, the most watched number in earnings season, comes from the income statement. Learning to read each line helps traders see not just whether a company made money, but how and whether that is sustainable.

## The structure

| Line | Meaning |
|---|---|
| Revenue (sales) | Money earned from selling goods and services |
| Cost of goods sold (COGS) | Direct costs of producing what was sold |
| **Gross profit** | Revenue minus COGS |
| Operating expenses | Selling, general and administrative (SG&A), research and development (R&D) |
| **Operating income (EBIT)** | Gross profit minus operating expenses |
| Interest expense and other items | Financing costs, investment income, one off gains and losses |
| **Pre tax income** | Operating income after interest and other items |
| Income tax | Taxes on profit |
| **Net income** | Profit after all expenses and taxes |
| Earnings per share (EPS) | Net income divided by shares outstanding |

## A worked example

**Example: A simple income statement**
| Line | $ millions |
|---|---|
| Revenue | 1,000 |
| Cost of goods sold | (600) |
| Gross profit | 400 |
| SG&A | (150) |
| R&D | (80) |
| Operating income | 170 |
| Interest expense | (20) |
| Pre tax income | 150 |
| Income tax (21%) | (31.5) |
| Net income | 118.5 |
| Diluted shares | 100 million |
| Diluted EPS | $1.185 |

Margins: gross 40%, operating 17%, net about 11.9%. See [Revenue Growth and Margin Analysis](https://learn.tradelabsai.com/fundamentals/margin-analysis/).

## Key lines in detail

- **Revenue:** growth rate and quality matter most. See [Revenue and Gross Profit](https://learn.tradelabsai.com/fundamentals/revenue-and-gross-profit/).
- **Gross profit and gross margin:** reflect pricing power and production efficiency.
- **Operating expenses:** R&D and marketing can be investments in future growth.
- **Operating income (EBIT):** profit from the core business. See [Operating Income, EBIT and EBITDA](https://learn.tradelabsai.com/fundamentals/operating-income-ebit-and-ebitda/).
- **Net income and EPS:** what shareholders earn. See [Net Income and EPS](https://learn.tradelabsai.com/fundamentals/net-income-and-eps/).

## Non cash and one off items

Income statements include non cash charges such as depreciation, amortisation and stock based compensation, and one off items such as restructuring costs, impairments or gains on asset sales. Companies often present adjusted figures that exclude these. Traders should understand what is excluded and whether "one off" charges recur every year. See [Earnings Quality and Cash Conversion](https://learn.tradelabsai.com/fundamentals/earnings-quality/).

## What traders watch

| Metric | Why |
|---|---|
| Revenue vs consensus | Growth surprises move stocks. See [Analyst Estimates, Surprises and Whisper Numbers](https://learn.tradelabsai.com/fundamentals/earnings-surprises/) |
| EPS vs consensus | The headline beat or miss |
| Margins vs last year | Signs of pricing power or cost pressure |
| Operating leverage | Profit growing faster than revenue. See [Operating and Financial Leverage](https://learn.tradelabsai.com/fundamentals/operating-and-financial-leverage/) |
| Segment results | Which parts of the business drive growth |
| Share count | Dilution or buybacks. See [Buybacks](https://learn.tradelabsai.com/fundamentals/buybacks/) |

## Year over year and sequential comparisons

Many businesses are seasonal, so traders compare a quarter with the same quarter last year (year over year) rather than the previous quarter (sequential). Retailers, for example, earn much of their profit in the holiday quarter.

## Limits of the income statement

- **Accrual accounting** recognises revenue when earned, not when cash is received, so profit can differ from cash. See [Cash Flow Statement](https://learn.tradelabsai.com/fundamentals/cash-flow-statement/).
- **Accounting choices** affect reported profit, such as depreciation periods and revenue recognition.
- **It does not show** debt levels or asset quality; for that, read the [Balance Sheet](https://learn.tradelabsai.com/fundamentals/balance-sheet/).

## Frequently asked questions

### What is an income statement?

A financial statement that shows a company's revenue, expenses and profit over a period, ending with net income and earnings per share.

### What is the difference between gross profit and net income?

Gross profit is revenue minus the direct cost of goods sold; net income is what remains after all expenses, interest and taxes.

### Why do companies report adjusted earnings?

To exclude items management considers unusual or non cash, though these adjustments can sometimes make results look better than they are.

Next, learn what a company owns and owes in the [Balance Sheet](https://learn.tradelabsai.com/fundamentals/balance-sheet/).

## Continue learning

- Next lesson: [Balance Sheet](https://learn.tradelabsai.com/fundamentals/balance-sheet/)
- Previous lesson: [Reading Financial Statements](https://learn.tradelabsai.com/fundamentals/reading-financial-statements/)
- Related: [Reading Financial Statements](https://learn.tradelabsai.com/fundamentals/reading-financial-statements/): Learn how the income statement, balance sheet and cash flow statement fit together, where to find them and what traders look for first in a company's filings.
- Related: [Revenue and Gross Profit](https://learn.tradelabsai.com/fundamentals/revenue-and-gross-profit/): Revenue is what a company sells; gross profit is what remains after direct costs. Learn revenue recognition, growth metrics, gross margin and what they reveal.
- Related: [Operating Income, EBIT and EBITDA](https://learn.tradelabsai.com/fundamentals/operating-income-ebit-and-ebitda/): Operating income and EBIT measure profit from the core business; EBITDA adds back depreciation and amortisation. Learn the formulas, uses and EBITDA's flaws.
- Related: [Net Income and EPS](https://learn.tradelabsai.com/fundamentals/net-income-and-eps/): Net income is profit after all costs; EPS divides it by shares. Learn basic vs diluted EPS, GAAP vs adjusted EPS, buyback effects and how traders use EPS.
- Related: [Revenue Growth and Margin Analysis](https://learn.tradelabsai.com/fundamentals/margin-analysis/): Profit margins show how much of each dollar of sales a company keeps. Learn gross, operating, EBITDA and net margins, how to analyse trends and what drives them.
- Related: [Balance Sheet](https://learn.tradelabsai.com/fundamentals/balance-sheet/): The balance sheet shows what a company owns, owes and the equity left for shareholders. Learn the main items, key ratios and red flags traders look for.