​INCOME STATEMENT

INCOME STATEMENT​

(OPERATING STATEMENT, STATEMENT OF OPERATIONS, PROFIT AND LOSS STATEMENT, P& L)

SALES (INCOME/REVENUE)

• Adjustments
  

TOTAL SALES

COST OF GOODS SOLD (COGS/Direct Costs)

TOTAL COST OF GOODS SOLD

GROSS PROFIT

OPERATING EXPENSES (Overhead/Indirect Costs)

• Marketing & Selling
  

• General & Administrative
  

• Depreciation & Amortization
  

• Interest
  

• Taxes
  

• Other Expenses
  

TOTAL OPERATING EXPENSES (OVERHEAD)

GROSS OPERATING PROFIT

Plus OTHER INCOME

NET PROFIT

INCOME STATEMENT (EBIT)

(OPERATING STATEMENT, STATEMENT OF OPERATIONS, PROFIT AND LOSS STATEMENT, P& L)

SALES (INCOME/REVENUE)

• Adjustments
  

TOTAL SALES

COST OF GOODS SOLD (COGS/Direct Costs)

TOTAL COST OF GOODS SOLD

GROSS PROFIT

OPERATING EXPENSES (Overhead/Indirect Costs)

• Marketing & Selling
  

• General & Administrative
  

• Depreciation & Amortization
  

EARNINGS BEFORE INTEREST AND TAX (EBIT)

INTEREST & OTHER RELATED INTEREST EXPENSE

TAXES & OTHER RELATED TAX EXPENSE

NET PROFIT AFTER TAX

INCOME STATEMENT (EBITDA)

(OPERATING STATEMENT, STATEMENT OF OPERATIONS, PROFIT AND LOSS STATEMENT, P& L)

SALES (INCOME/REVENUE)

• Adjustments
  

TOTAL SALES

COST OF GOODS SOLD (COGS/Direct Costs)

TOTAL COST OF GOODS SOLD

GROSS PROFIT

OPERATING EXPENSES (Overhead/Indirect Costs)

• Marketing & Selling
  

• General & Administrative
  

EARNINGS BEFORE INTEREST, TAX, DEPRECIATION & AMORTIZATION (EBITDA)

INTEREST & OTHER RELATED INTEREST EXPENSE

TAXES & OTHER RELATED TAX EXPENSE

DEPRECIATION & AMORTIZATION EXPENSE

NET PROFIT AFTER TAX

KEY CONSIDERATION POINTS FOR THE INCOME STATEMENT

The INCOME STATEMENT is divided into three (3) distinct sections:  

INCOME (SALES or REVENUE), EXPENSES (COSTS) & PROFIT

(The 3 sections are outlined in separate boxes in the INCOME STATEMENT above.)

1.     THE HIDDEN LINE…Have you ever heard financial or accounting people talk about costs or expenses ‘above’ or ‘below’ the line? Well, the 

        line is hidden. (The hidden line is shown as a broken line in the INCOME STATEMENT above.) The COSTS above the line represent COSTS 

        associated with the SALES during the period under review. In other words, how much did the goods we sold or the service we provided actually 

        cost? Because they are directly associated these COSTS are often referred to as DIRECT COSTS. There are, however, other cost and expenses 

        involved. These costs and expenses are called OPERATING EXPENSES. They represent expenses that must be paid regardless of sales or 

        services provided, just to keep the doors of the company open. Financial and Accounting people often address these expenses as INDIRECT 

        COSTS or simply OVERHEAD. So the HIDDEN LINE separates DIRECT AND INDIRECT COSTS.  

2.     The INCOME STATEMENT is called by many other names. You may see it as the OPERATING STATEMENT, the STATEMENT OF 

        OPERATIONS, the PROFIT AND LOSS STATEMENT or the P&L. It is all the same information.

3.     COSTS OF GOODS SOLD are the DIRECT COSTS associated with the SALES for the given period. You may see them referred to as 

        COSTS OF SALE or COSTS OF SERVICE.

4.     OPERATING EXPENSES are the INDIRECT COSTS associated with keeping the doors of the business open. These are the expenses that 

        must be paid regardless of what else happens. They are often referred to as OVERHEAD.

5.     NET PROFIT BEFORE TAX is sometimes referred to as EBIT. EBIT stands for Earnings Before Interest & Taxes. You may also see the 

        reference to EBITDA. EBITDA stands for Earnings Before Interest, Taxes, Depreciation & Amortization. Think of EBIT and EBITDA as ‘PURE 

        PROFIT. When companies want to make certain nothing interferes with understanding what operations are actually producing, they exclude 

        anything that would tend to distort the picture. By eliminating Interest, Taxes, Depreciation and Amortization they get a much clearer picture of 

        how the company is really performing.

6.     The INCOME STATEMENT can be dangerous in this regard. The INCOME STATEMENT contains estimates and assumptions—not just 

        actual numbers. References to TAXES, DEPRECIATION and AMORTIZATION are often estimates rendered by Financial and Accounting    

        people based on the SALES for the given period. Please note, that many times such things as TAXES have not been paid as of yet and are subject 

        to change. 

7.     NET PROFIT (AFTER TAX) is one of the 3 Bottom Lines in business. It tells you if the goods you sold or the services you provided, produced a 

        surplus. In essence it will tell you if you are pricing your goods or services correctly. NET PROFIT AFTER TAX is not, however, actual cash you 

        can spend. Profit must be turned into cash. You may sell a good or service to someone and on paper show a profit (which is taxable at that time), 

        but until you collect the money from them you cannot spend it. So it is very possible to make a profit and still go out of business. Profitability alone 

        then cannot be your sole focus in business. A fact often overlooked by many until it is too late.

8.     THE COMMON SIZE RATIO exercise performed on the BALANCE SHEET can also be performed on the INCOME STATEMENT. The 

        Foundational Number or the “Common Number” on the INCOME STATEMENT is TOTAL INCOME or TOTAL SALES. Every number on 

        the INCOME STATEMENT is divided by TOTAL SALES. Once again dollars are turned into percentages and can be used for comparison 

        within the industry and also with that of competitors. There is an added advantage of using the COMMON SIZE RATIO exercise on the 

        INCOME STATEMENT. You now have your OVERHEAD expressed as percentages. Your OVERHEAD costs can now be tracked over an 

        extended period of time and trends can be noted and evaluated. Doing this consistently will save time, effort and capital when constructing your 

        BUDGET. You will find that much of your work on the BUDGET will already be done.

9.     GROSS PROFIT is obtained by subtracting COSTS OF GOODS SOLD from SALES. GROSS PROFIT is sometimes referred to as the 

        CONTRIBUTION MARGIN. The reason for this is pretty straight forward. OVERHEAD has not been figured in as of yet. Only the DIRECT 

        COSTS, those directly tied to sales made or services provided are included in determining GROSS PROFIT. The name CONTRIBUTION 

        MARGIN comes from the fact that GROSS PROFIT will tell you how much you have left over to “Contribute” to covering OVERHEAD.

10.   The INCOME or SALES section provides dollar totals for the given period. What is not indicated is the quantity necessary to produce the actual 

        SALES dollar totals. It is an extremely wise exercise to take the time and calculate the quantity sold or the billable hours of service provided that 

        produced the SALES figures. Armed with that information you are in position to determine the BREAK EVEN POINT, which is another of the 

        indispensable business tools necessary for survival.  

11.   OPERATING PROFIT can be of immense value to both Managers and Ownership. Used in conjunction with OPERATING CASH FLOW 

        (found on the CASH FLOW STATEMENT) OPERATING PROFIT will help keep your finger on the pulse of your overhead expenses. It can 

        provide a Red Flag Warning well in advance of potential danger.