How to Read an Income Statement
Learn to read and analyze an income statement to evaluate your company’s profitability.
The income statement is a fundamental accounting document reflecting an organization’s financial status. Leaders can assess operational profits or losses.
What is an income statement?
It’s a summary accounting document defining company profitability over a specific period. It includes revenues and expenses, showing whether the business is profitable or operating at a loss.
Why produce this report?
For managers: Compare financial results against objectives, set budgets, identify most profitable activities.
For investors: Evaluate company profitability for investment decisions.
For creditors: Assess financial situation before granting loans.
Key definitions
- Gross margin: Difference between revenue and cost of goods sold
- Operating expenses: Indirect production costs (rent, utilities, marketing)
- Net income: Total profits after all deductions
- EBIT: Earnings before interest and taxes
Breakeven point
The breakeven point shows the minimum sales needed for a positive result. Formula: indirect costs ÷ gross margin percentage.