How To Read An Income Statement

Man managing reciepts
••• Richard Elliott/Getty Images

An income statement is a standard financial document that summarizes a company's revenue and expenses for a specific period of time, usually one-quarter of a fiscal year as well as the entire fiscal year. It is important that both investors and company managers be able to read and understand this document in order to understand the company's financial condition. Financial professionals tend to rate the degree of difficulty for reading this document as "average" and, of course, the time required varies depending on the size of the company and complexity of the document.

The nuts and bolts of income statements include:

Sales Revenue

Often called the "top line" this represents the amount the company has sold during a given period. When there is more than one line of revenue shown above the Total Sales Revenue, the statement provides detail as to which products or services are major revenue producers.

Sales Costs

This figure is what it costs the company to generate the sales figure shown in the Total Sales Revenue above. You should compare the total costs to the total revenue, but also look at the cost of each line of product or service versus its revenue. The Sales Cost is also known as Cost of Goods Sold (CGS).

Gross Profit or (Loss)

This is the difference between the Sales Revenue and the Sales Costs. If the difference is positive, then the company is making a profit. Conversely, a negative difference is a loss and this is shown in brackets as (Loss).

General and Administrative Expenses, or G&A

These are the costs associated with running the company as opposed to the costs of making or buying the products (i.e., Cost of Goods Sold). These costs should be monitored closely and kept as low as possible.

Sales and Marketing Expenses

These are the costs not directly related to producing the product or service to be sold. While it is important to promote your product or service, these costs are not imperative to the operation of the company and should be monitored and compared (frequently) to what other companies (with similar or the same products) are spending.

Research and Development (R&D) Expenses

This is the part of a company's income that is being reinvested in the business to find and develop new products. This figure is an indication of how much management values a particular innovation. If you look at whether this figure increases or decreases from year to year you can gauge product innovation.

Operating Income

This is what is left when you subtract all the operating expenses from the company's Gross Profit.

Income Before Taxes

After subtracting any interest paid on outstanding debt from Total Operating Income you are left with Income Before Taxes. This is the amount the company expects to have to pay taxes on.


This is the amount the company has paid (or expects to pay) in taxes for a given period. It includes all taxes to all jurisdictions.

Net Income From Continuing Operations

After subtracting taxes from income, the Net Income is this is what the company is left with. This figure is the equivalent to a workers take-home pay.

Profit Margin

This varies from industry to industry but is a good way to compare similar companies, from either an investment or a benchmarking perspective. You can view this figure as being similar to the interest rate you get on your investment. The 5-6% shown by this company is considered low for a manufacturer and would warrant looking into.

Non-Recurring Events

This is the cost of any one-time expense such as restructuring the business, a major layoff, or an un-reimbursed casualty loss. These are shown on a separate line to prevent being confused with the Continuing Operations figure above.

Net Income

This is what the company has left after subtracting all its expenses from its total revenue. If the difference is positive it is profit. A negative difference is a loss and is shown in brackets. For a company to remain healthy and stay in business, this number needs to be positive the majority of the time. For-profit companies strive to make their Net Income number as positive as possible.

Dividends to Shareholders

Companies pay dividends to the shareholders who own a part of the company. If any dividends have been paid during the period being reported, they are reported on this line. These can be dividends paid to common stockholders, preferred stockholders, or other investors. Dividends usually are paid only once a year.

Net Income Available to Shareholders

This is "the bottom line". This is the money the company has left at the end of a given period. It is held onto for future needs, invested as the Board directs, or returned to investors in the future.