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What the income statement shows

The income statement reports what a company earned and spent over a period, usually a quarter or a year. It runs top to bottom. Revenue (sales) comes first, then cost of goods sold (COGS), the direct cost of what was sold. Revenue minus COGS is gross profit. Next come operating expenses such as salaries, rent, marketing and depreciation. What is left is operating income, also called EBIT (earnings before interest and tax). Then interest on debt is deducted, then tax on the remaining pre-tax income, leaving net income, the bottom line. Example: revenue 100, COGS 40, operating expenses 30 gives EBIT 30; interest 10 leaves pre-tax income 20; tax at 25% is 5; net income is 15. Tax is always a percentage of pre-tax income, never of revenue.

• Revenue minus COGS is gross profit; minus operating expenses it is EBIT.
• EBIT minus interest is pre-tax income; minus tax it is net income.
• Tax is charged on pre-tax income, after interest.