Income Statement

P&L: measuring results over a period
The Income Statement (Profit & Loss Statement, Statement of Operations) shows the financial results of a company’s operations over a specific period — a quarter, a year. Unlike the balance sheet (a snapshot at a date), the P&L is a flow over a period.

Structure of the Income Statement
Revenue (Sales, Net Sales): monetary inflows from core operations. Recognized when control over the goods/services is transferred to the customer (IFRS 15).
Net Sales = Gross Sales - Returns - Discounts - Allowances.

Cost of Goods Sold (COGS, Cost of Revenue): direct expenses for producing the goods/services sold.
For a manufacturer: materials, labor, production overhead.
For a retailer: purchase cost of goods.
For a service company: wages of executors, direct project expenses.

Gross Profit: Revenue - COGS. Shows the profitability of the core product before operating expenses.
Gross Margin = Gross Profit / Revenue — a key metric for comparing companies.

Operating Expenses (OpEx)
Operating expenses are expenses for running the business not directly tied to production.

Typical categories:
Selling, General & Administrative (SG&A): salaries of management and office staff, marketing and advertising, office rent, legal and consulting services, business travel, insurance.
Research & Development (R&D): expenses for research and development. Critically important for technology and pharmaceutical companies. Under GAAP mainly expensed (written off immediately); under IFRS, development costs may be capitalized if criteria are met.
Depreciation & Amortization (D&A): non-cash expense reflecting the wear of fixed assets (depreciation) and intangible assets (amortization). Allocates capital expenditures over the period of asset use.

Operating Income (Operating Profit)
Operating Income = Gross Profit - Operating Expenses.
Also called EBIT (Earnings Before Interest and Taxes) — profit before interest and taxes. Shows the profitability of core operations, independent of financing structure and tax regime.
Operating Margin = Operating Income / Revenue.
A key metric of operating efficiency. Comparing operating margin among industry companies shows relative efficiency.

EBITDA
EBITDA = EBIT + Depreciation + Amortization = Operating Income + D&A.
Earnings before interest, taxes, depreciation, and amortization.
Often used as a proxy for operating cash flow, though it does not account for changes in working capital or capital expenditures.

EBITDA is popular in valuation because:

• eliminates the impact of differences in accounting policies (depreciation methods);
• eliminates the impact of capital structure (interest);
• allows comparison of companies with different asset ages.

But EBITDA does not account for actual cash needs for asset replacement (CAPEX).

Non-operating items
Interest Expense: costs of servicing debt.
Interest Income: income from financial investments.
The difference Net Interest — net financial expenses/income.

Other Income/Expense: one-off items not related to core business — gain/loss on asset sales, currency translations, investment profits.

Earnings before taxes and net income
Earnings Before Taxes (EBT, Pre-tax Income):
Operating Income + Non-operating Items - Interest Expense.
Profit before taxation.

Income Tax Expense: expense for corporate income tax. Includes current tax (payable) and deferred tax (timing differences between accounting and tax records).

Net Income (Net Profit, Earnings): EBT - Taxes.
The “bottom line” of the statement. Profit attributable to shareholders. From this, dividends are paid or it is reinvested (retained earnings).

Earnings Per Share (EPS)
Basic EPS = Net Income / Weighted Average Shares Outstanding.
Earnings per common share.

Diluted EPS: takes into account potential dilution from options, convertible instruments. Shows earnings per share assuming all convertible instruments are converted.

EPS is a key figure for investors, the basis for the P/E multiple.
Wall Street watches for “beating or missing” EPS expectations.

Presentation formats
Single-step: all revenues together, all expenses together, one subtraction. Simple format.
Multi-step: intermediate subtotals (Gross Profit, Operating Income, EBT). More informative, standard for public companies.

Function vs Nature: expenses can be classified by function (COGS, SG&A, R&D) or by nature (materials, salaries, depreciation). IFRS allows both; US GAAP usually by function.

Quality of earnings
Not all earnings are equally valuable. Quality analysis includes:

• recurring vs one-time items (sustainability);
• accruals vs cash (how much earnings are backed by cash flows);
• aggressiveness of revenue recognition;
• conservativeness of expense recognition.

More details — in the module on ratio analysis.