The 3 statements · 1

The income statement

Also called the profit & loss (P&L) or statement of operations. It answers one question: during this year, did the company make or lose money — and how?

👴 In one sentence Money in at the top, every cost subtracted step by step, profit at the bottom.

Rat Bakery's income statement

Read it from top to bottom. Each orange arrow explains the line it sits next to.

Rat Bakery Ltd. — Income statement Year ended 31 Dec 2025 · in $
Revenue500,000
Revenue (or "sales", "turnover"): every loaf and cake sold. Also called the top line.
Cost of goods sold(200,000)
Costs directly tied to each loaf: flour, butter, eggs and the bakers' wages. Sell more bread → this grows too.
Gross profit300,000
Revenue − cost of goods. From each $1 of bread sold, 60¢ is left (gross margin 60%).
Rent & utilities(60,000)
The shop, electricity, water. Paid even if no bread is sold: a fixed cost.
Salaries (shop & office)(90,000)
Cashiers and the manager. In big companies this is part of SG&A (selling, general & administrative).
Marketing(20,000)
Flyers and social media ads.
Depreciation(30,000)
The ovens cost $300,000 and last ~10 years, so each year we count 1/10th of their price as a cost. No cash leaves this year!
Operating income (EBIT)100,000
Profit from running the bakery, before loans and taxes. EBIT = Earnings Before Interest and Taxes.
Interest expense(10,000)
The price of the $100,000 bank loan (10% a year). Depends on how the bakery is financed, not how well it bakes.
Profit before tax90,000
What the tax office looks at.
Income tax (20%)(18,000)
20% of $90,000. The effective tax rate = tax ÷ profit before tax.
Net income72,000
The bottom line: profit that belongs to the owners. They can keep it in the business or pay it out as dividends.
Shares outstanding10,000
The bakery is split into 10,000 equal slices (shares).
Earnings per share (EPS)7.20
$72,000 ÷ 10,000 shares. Each share "earned" $7.20 this year. Used in the P/E ratio (valuation lessons).

Three kinds of profit — and why there are three

Each profit line removes one more layer of costs. Comparing them tells you where the money goes.

Gross profit

60%

Is the product itself profitable? A software company may keep 80%, a supermarket only 25%.

Operating profit

20%

Is the whole business well run, after rent, staff and marketing?

Net profit

14.4%

What the owners finally keep after the bank and the tax office.

What is EBITDA?

You will see EBITDA everywhere: Earnings Before Interest, Taxes, Depreciation and Amortization. It is operating income with depreciation added back, a rough measure of the cash the operations produce.

EBITDA = Operating income + Depreciation & amortization = 100,000 + 30,000 = 130,000
⚠️ Careful EBITDA ignores that ovens wear out and must be replaced one day. A company with huge machinery can look great on EBITDA and still struggle. Always look at the cash flow statement too.

Questions an analyst asks of an income statement

  1. Is revenue growing? Compare several years, not one. Our analysis pages show 10.
  2. Are margins stable, rising or falling? Rising margins mean each extra sale is more profitable.
  3. Are there one-off items? A big lawsuit or a factory sale can make one year look unusually bad or good.
  4. Does net income turn into cash? Profit is an accounting opinion; cash is a fact. Check the cash flow statement.
✏️ Check yourself: next year Rat Bakery sells 10% more bread, and flour costs stay at 40% of revenue. Rent and salaries don't change. What happens to the gross margin and to the operating margin?
Show the answer

Revenue → $550,000, cost of goods → $220,000, gross profit → $330,000: the gross margin stays at 60%. But fixed costs (rent, salaries, marketing, depreciation = $200,000) don't grow, so operating income becomes $130,000 and the operating margin rises to 23.6%. This effect is called operating leverage — and it works in reverse when sales fall. Remember it for the economic cycle lesson!