Income statement

A report of what a business earned and what it spent over a period of time, arranged in layers from revenue at the top down to net profit at the bottom.

Example

Northgate Tools reported revenue of 4,200,000 and net profit of 345,000 for Year 2.

Important

It describes performance, not cash. A business can report record profit in a year its bank balance collapsed, with nothing improper anywhere.

Related terms

• Revenue — The value of goods or services a business sold during a period, before any costs are subtracted. Also called turnover or the top line.
• Net profit — What remains after every cost, including interest and tax, has been subtracted from revenue. The bottom line of the income statement.
• Accrual accounting — The convention under which revenue is recorded when it is earned and costs when they are incurred, regardless of when money actually changed hands.

Lessons that explain it

• The income statement: what it claims was earned — The income statement is a claim about performance over a period, assembled under rules that deliberately ignore when the cash moved. Read properly it is the most useful statement; read literally it is the most misleading. (12 min)
• What the three say together — Each statement answers a question the others cannot, and the interesting information is almost always in the disagreements between them rather than in any single figure. (14 min)

All 578 terms in the Investing glossary