Income statement

The income statement covers a period, such as a quarter or a year, and works down from sales to profit. It starts with revenue, subtracts the cost of sales to give gross profit, then subtracts operating expenses such as wages, marketing and depreciation to give operating profit. Interest costs and tax are then deducted to reach net profit, sometimes called the bottom line, which is divided by the number of shares to give earnings per share. Under accrual accounting, revenue and costs are recorded when they are earned or incurred, not when cash changes hands.

Investors use the income statement to see how fast a company is growing and how profitable it is, often through margins: gross, operating and net profit as percentages of revenue. Trends over several years say more than a single period. Be careful with one-off items and the adjusted figures that companies present alongside the official numbers, as these can flatter results. And because of accrual accounting, a company can report a profit while running short of cash, which is why the income statement should be read together with the cash flow statement.