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What is an 'Income Statement'

An income statement is a financial statement that reports a company's financial performance over a specific accounting period. Financial performance is assessed by giving a summary of how the business incurs its revenues and expenses through both operating and non-operating activities. It also shows the net profit or loss incurred over a specific accounting period.

BREAKING DOWN 'Income Statement'

Also known as the profit and loss statement or statement of revenue and expense, the income statement is the one of three major financial statements in the annual report and 10-K. All public companies must submit these legal documents to the Securities and Exchange Commission (SEC) and investor public. The other two financial statements are the balance sheet and the statement of cash flows. All three provide investors with information about the state of the company's financial affairs, but the income statement is the only one that provides an overview of company sales and net income.

Income Statement

Unlike the balance sheet, which covers one moment in time, the income statement provides performance information about a time period. It begins with sales and works down to net income and earnings per share (EPS).

The income statement is divided into two parts: operating and non-operating. The operating portion of the income statement discloses information about revenues and expenses that are a direct result of regular business operations. For example, if a business creates sports equipment, it should make money through the sale and/or production of sports equipment. The non-operating section discloses revenue and expense information about activities that are not directly tied to a company's regular operations. Continuing with the same example, if the sports company sells real estate and investment securities, the gain from the sale is listed in the non-operating items section.

Income Statement Uses

Analysts use the income statement for data to calculate financial ratios such as return on equity (ROE), return on assets (ROA), gross profit, operating profit, earnings before interest and taxes (EBIT), and earnings before interest taxes and amortization (EBITDA). The income statement is often presented in a common-sized format, which provides each line item on the income statement as a percent of sales. In this way, analysts can easily see which expenses make up the largest portion of sales. Analysts also use the income statement to compare year-over-year (YOY) and quarter-over-quarter (QOQ) performance. The income statement typically provides two to three years of historical data for comparison.

To learn more about the income statement and how to use them in investment selection, please read Understanding The Income Statement and Find Investment Quality In The Income Statement.

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