Module 3 of 11 16 min
Reading an Income Statement
Walk through an income statement line by line.
Course lessons
Step 1
The lesson
The income statement (also called the profit and loss statement, or P&L) shows revenue, expenses, and profit over a period of time — usually a quarter or a year.
It reads from top to bottom, like a staircase. Each step subtracts another kind of cost. That's why net income is called the bottom line.
- Revenue (sales)
- − Cost of goods sold → Gross profit
- − Operating expenses (wages, rent, marketing, research) → Operating income
- − Interest on debt → Pre-tax income
- − Income taxes → Net income
One statement tells you a little. Comparing periods tells you a lot. Is revenue growing? Are margins rising or shrinking? Is profit growing faster or slower than sales?
Step 2
See it
A hypothetical outdoor gear retailer has revenue of $2,400,000, gross profit of $1,080,000, operating income of $300,000, pre-tax income of $260,000 after $40,000 of interest, and net income of $205,400 after $54,600 of taxes.
- Revenue
- $2,400,000
- Cost of goods sold
- −$1,320,000
- Gross profit45% margin
- $1,080,000
- Operating expenses
- −$780,000
- Operating income12.5% margin
- $300,000
- Interest expense
- −$40,000
- Pre-tax income
- $260,000
- Income taxes
- −$54,600
- Net income8.6% margin
- $205,400
Step 3
Real-world example
What changed since last year?
Last year, Trailhead had $2,000,000 in revenue and $150,000 in net income. This year: $2,400,000 and $205,400.
- Revenue grew 20%.
- Net income grew 37% — faster than revenue.
- Net margin rose from 7.5% to 8.6%.
When profit grows faster than sales, the business is getting more efficient — often because fixed costs are spread over more sales. That's a good sign. The next question: can it last?
Step 4
Try it: build an income statement
Enter Trailhead's numbers — revenue $2,400,000, COGS $1,320,000, operating expenses $780,000 — and compare the margins.
Your numbers
Direct costs of what was sold: ingredients, inventory, materials.
Running the business: wages, rent, marketing, software.
Results
Gross margin
45%
Operating margin
12.5%
Net margin
8.6%
$205,400 net profit
| Revenue | $2,400,000 |
|---|---|
| − Cost of goods sold | −$1,320,000 |
| Gross profit45% margin | $1,080,000 |
| − Operating expenses | −$780,000 |
| Operating income12.5% margin | $300,000 |
| − Interest and taxes | −$94,600 |
| Net profit8.6% margin | $205,400 |
Educational calculator, not financial advice. Results are hypothetical estimates based on the numbers you enter.
Step 5
Knowledge check
Answer each question, then check your answer to see the explanation. Retake it as many times as you like.
Question 1 of 3
Step 6
Summary
The income statement shows revenue, expenses, and profit over a period. It steps down from revenue to gross profit, operating income, pre-tax income, and net income. Comparing periods — growth rates and margins — reveals whether a business is getting stronger.
Step 7
What you should remember
- Income statement = performance over a period.
- Revenue → gross profit → operating income → net income.
- Compare periods: growth and margin trends matter most.
- Real filings are free on the SEC's EDGAR site.
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