Income statement
Also known as: profit and loss statement, statement of profit or loss, p&l
An income statement is a financial statement that reports a company's revenues, expenses, and resulting profit or loss over a period of time. It answers whether the business made money during the quarter or year.
The income statement is one of the core financial statements, alongside the balance sheet and the statement of cash flows. Where a balance sheet is a snapshot of what a company owns and owes on a single date, the income statement covers a span of time — a quarter or a fiscal year — and summarizes performance over that span. Under IFRS it is usually titled the statement of profit or loss.
It reads top to bottom as a series of subtractions. Revenue sits at the top. Subtracting cost of goods sold gives gross profit. Subtracting operating expenses such as selling, general, and administrative costs and depreciation gives operating income. Interest and taxes come off next, leaving net income — the bottom line that flows into retained earnings on the balance sheet and drives earnings per share.
An important consequence of accrual accounting is that the income statement is not a cash report. Revenue is recognized when it is earned and expenses when they are incurred, regardless of when money changes hands, so a profitable company can still run short of cash. That gap is exactly what the statement of cash flows exists to explain. Some items, such as unrealized gains on certain investments and foreign currency translation adjustments, bypass net income entirely and appear in other comprehensive income.
Because it reveals margins, cost structure, and trend in profitability, the income statement is the starting point for fundamental analysis and for ratios such as gross margin, operating margin, and return on sales.
Exam coverage varies by credential. CMA Part 1 tests income statement preparation, presentation formats, and the treatment of comprehensive income; the ACCA Financial Accounting exam asks you to extract the statement of profit or loss from a general ledger and reconcile it to cash flows; and the Series 6 uses it more narrowly, as one of the financial facts a representative gathers when building an investor profile for suitability.
Key takeaways
- An income statement reports revenues, expenses, and profit over a period rather than at a point in time.
- It steps down from revenue to gross profit, operating income, and finally net income.
- Accrual accounting means it records earned revenue and incurred expenses, not cash received or paid.
- Net income flows into retained earnings and underpins earnings per share.
- Items such as certain unrealized gains appear in other comprehensive income rather than net income.