Income statements
The income statement
- An income statement shows the profit made over a period (usually a year).
$$\text{gross profit} = \text{revenue} - \text{cost of sales}$$
$$\text{profit for the year} = \text{gross profit} - \text{expenses}$$
- cost of sales = the cost of the goods actually sold; expenses = other running costs (rent, wages, advertising).
Practice
Revenue is 50,000 and cost of sales is 30,000. What is the gross profit (in dollars)?
Gross profit = revenue − cost of sales = 50,000 − 30,000 = 20,000.
Practice
Gross profit is 20,000 and expenses are 12,000. What is the profit for the year (in dollars)?
Profit for the year = gross profit − expenses = 20,000 − 12,000 = 8,000.
Who uses it
- owners check the profit; lenders check their loans are safe; managers look for problems.
Practice
A lender reads the income statement mainly to check:
Lenders want to know the business is profitable enough to repay loans.
You've got it
Key idea
- gross profit = revenue − cost of sales; profit for the year = gross profit − expenses
- the statement steps down from revenue to profit for the year
- read by owners, lenders and managers