The income statement: did the company make money?

A report card for a stretch of time

The income statement shows what a company earned and spent over a period, usually a quarter or a full year. You may also see it called the profit and loss statement (P&L) or the statement of operations. They are the same report.

The idea is simple. Start with what customers paid, subtract the costs of running the business, and what is left is profit (or a loss).

One detail matters a lot. A sale counts when the goods are delivered, not when the customer pays, so a sale can be recorded today and paid for two months later. That gap returns in the cash flow lesson.

Meet Pebble Creek Bikes

All four lessons in this track follow the same made-up company, Pebble Creek Bikes Inc. It builds bicycles in a small workshop and sells them in its own store and to bike shops in nearby towns. Pretend it is a tiny public company with 100,000 shares.

This year sales jumped from $1.5 million to $2 million. Did profit keep up?

Walking down the statement

Each step down the statement subtracts one kind of cost and leaves a new kind of profit.

• Revenue is the top line: what customers were charged for bikes, parts and repairs.
• Cost of goods sold is what it cost to make the bikes that were actually sold: frames, wheels, paint and the workshop crew’s pay.
• Gross profit is revenue minus cost of goods sold. It shows whether the product itself makes money.
• Operating expenses are the costs of running the company that aren’t tied to any one bike, like store rent, office salaries and ads. They also include depreciation, which spreads the cost of a big purchase, like a welding machine, over the years it will be used.
• Operating income is gross profit minus operating expenses. It is what the everyday business earns before paying lenders or the government.
• Interest expense is the cost of borrowed money.
• Income tax is the company’s tax bill on its profit.
• Net income is what remains after every cost: the bottom line.
• Earnings per share (EPS) is net income divided by the number of shares. It tells you how much profit one share earned.

Margins: profit as a share of each sales dollar

A big company always earns more dollars than a small one, so dollars alone are hard to compare. A margin divides a profit line by revenue. It tells you how many cents the company kept, at that step, from each dollar customers paid.

• Gross margin = gross profit ÷ revenue. Pebble Creek: $800,000 ÷ $2,000,000 = 40%. Last year it was $630,000 ÷ $1,500,000 = 42%.
• Operating margin = operating income ÷ revenue. This year 10%, last year 11%.
• Net margin = net income ÷ revenue. This year 6%, last year 7%.

Every margin slipped. Pebble Creek sold many more bikes but kept fewer cents from each dollar. Maybe it cut prices to win new bike shops, or parts got pricier. The numbers show what happened. The written part of the annual report, covered in the 10-K lesson, is where management has to explain why.

Compare with the past and with look-alikes

A margin on its own means little. First, compare a company with itself over several years. A gross margin that drifts down year after year can mean the company must keep cutting prices to win sales. One that climbs can mean customers will pay more for what it sells.

Second, compare it with businesses that do the same work, because normal margins differ hugely by industry. A gas station resells fuel it bought, so it keeps only a thin slice of each sale. A company that charges toy makers to use its cartoon characters can keep a much fatter slice. Judge a bike maker against other bike makers, not against a cartoon studio.

One-time items and adjusted profit

Some costs show up once: closing a store, settling a lawsuit, or marking down something that turned out to be worth less than the company paid. Many companies also publish an adjusted profit that leaves them out. Adjusted figures are also called non-GAAP numbers, because they step outside the official accounting rulebook, GAAP.

Suppose next year Pebble Creek closes its downtown store, and the closing cost lowers net income by $40,000. Reported net income comes in at $100,000. A press release then highlights adjusted net income of $140,000, with the closing cost added back. If the store truly closes once, the adjusted number is a fair view of the ongoing business.

Still, read it with care:

• One-time costs that keep coming back are just costs. If a company has a special charge every single year, running the business includes those charges.
• The company chooses what to remove. Some adjustments drop real, recurring costs, such as paying employees with stock instead of cash.
• One bad year can be stuffed on purpose. Managers sometimes pile every possible write-off into a year that already looks rough, so later years look better by comparison.

The SEC requires a company that publishes an adjusted figure to also show the official one and explain the difference. Start from the official number, then decide which adjustments you believe.

Where to see it on Filing.fyi

The full income statement lives in each 10-K and 10-Q. On a company page, the filing timeline links straight to those reports, and the company’s separate filings page lists every one by category.

The score cards use these numbers too. The Piotroski F-Score checks whether gross margin improved from last year. The Beneish M-Score compares this year’s gross margin and sales growth with last year’s to look for numbers that seem too good. The P/E figure near the top of a company page divides the share price by a year of earnings per share. See how to read a Filing.fyi company page for the full tour.

This lesson is education, not investment advice. Examples use made-up companies and round numbers unless a real filing is named.