Income statement.
In plain English
An income statement lists revenue for a period, subtracts the costs of producing that revenue and running the business, and ends with net income or net loss. It reads top to bottom: revenue, cost of goods sold, gross profit, operating expenses, operating income, interest and taxes, then net income. It covers a span of time, a quarter or a year, unlike the balance sheet, which is a snapshot on a single date. Because it is built on accrual rules, net income is not the same thing as cash generated. That is why the cash flow statement exists alongside it.
01Why it matters
It is the statement that answers whether the business actually makes money doing what it does, and reading it in order shows you exactly where each dollar of revenue went.
02The math, step by step
Say a bakery reports 400,000 dollars of revenue, 160,000 dollars of cost of goods sold, and 180,000 dollars of operating expenses. Gross profit is 240,000 dollars (400,000 minus 160,000). Operating income is 60,000 dollars (240,000 minus 180,000). Interest and tax come out of that 60,000 dollars.
Illustrative example. The amounts here are hypothetical, chosen to show how the math works, not real quoted rates or figures.
03What this is NOT
Net income is not cash. The income statement includes non-cash charges like depreciation and counts revenue billed but not collected. A company can report solid net income and still have less cash than it started with, which is exactly what the cash flow statement is built to show.
04Receipts
Every figure on this page is sourced to a primary document. Tap to open the original.
Plain-English answers from our glossary. Receipts included. Never advice.
Educational tool. Answers come only from ClearMoneySchool's published glossary and are not advice. Why we never give advice