Reading an Income Statement — slides
Financial Literacy Club
Understanding Businesses · Lesson 3
Reading an Income Statement
Walk through an income statement line by line.
16-minute lesson · learnwithflc.org
Reading an Income Statement · 1 / 20
Financial Literacy Club
Understanding Businesses · Lesson 3
Reading an Income Statement
Walk through an income statement line by line.
16-minute lesson · learnwithflc.org
Today's goals
By the end of class, you'll be able to…
- Read an income statement from revenue to net income
- Compare two periods for growth and margin trends
- Locate real company filings on the SEC's EDGAR site
Warm-up
A company's sales grew 20%, but its profit fell. What might have happened?
Think, then write your answer.
The big idea
Reading an Income Statement
Walk through an income statement line by line.
Understanding Businesses · Lesson 3
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.
Understanding Businesses · Lesson 3
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.
Understanding Businesses · Lesson 3
- 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
Understanding Businesses · Lesson 3
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?
Understanding Businesses · Lesson 3
Where to find real ones
Public U.S. companies file their financial statements with the Securities and Exchange Commission. You can read them free on the SEC's EDGAR website or in a company's investor relations page.
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
Real 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?
Try it together
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.
Activity · pairs · 12 min
Line by Line
- Post a two-year statement. Year 1: revenue $500,000, cost of goods $300,000, operating expenses $150,000, interest $5,000, taxes $9,000. Year 2: revenue $600,000, cost of goods $390,000, operating expenses $160,000, interest $6,000, taxes $8,800.
- Pairs calculate gross profit, operating income, and net income for each year.
- Pairs calculate revenue growth, gross margin, and net margin for each year.
- Pairs write two sentences: what improved, and what got worse?
Check for understanding · 1 of 3
What time frame does an income statement cover?
- AA single moment, like December 31
- BThe company's entire history
- CA period of time, like a quarter or a year
- DOnly the next year
C. A period of time, like a quarter or a year
Income statements show activity over a period. The balance sheet is the snapshot at a moment.
Check for understanding · 2 of 3
A company's revenue grew 5% this year, but its net income fell 20%.
What's the most reasonable first question?
- AWhich costs grew faster than revenue?
- BHow many employees wear uniforms?
- CIs the logo changing?
- DNothing to investigate — revenue grew.
A. Which costs grew faster than revenue?
If profit fell while sales rose, some expense line grew faster. Finding which one is the analysis.
Check for understanding · 3 of 3
Operating income is $400,000. Interest is $50,000. Taxes are $70,000.
What is net income?
- A$400,000
- B$280,000
- C$350,000
- D$520,000
B. $280,000
$400,000 − $50,000 − $70,000 = $280,000.
Remember
Key takeaways
- 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.
Discuss
Talk it over
- Pick a public company you know. What would you want to learn from its income statement?
- Why might a company's profit grow faster than its revenue?
Exit ticket
An income statement shows performance over a ___. A balance sheet shows a ___.
Answer on your exit ticket before you leave.
Nice work today.
Review this lesson anytime — free, no account needed:
learnwithflc.org/courses/understanding-businesses/income-statement
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