Income Statement Basics

Basics of Income Statement

Income Statement provides a basic summary of the company’s revenues and expenses within a specified period.

Income statement starts with the revenue which a company makes by selling products to its customers. Since revenue sits at the top of the income statement, it is known as the top line for the company.
Other than revenue income statement consists of all other items that lead to the net income of a company that sits at the bottom. That’s why net income is also known as the bottom line of a companyBottom Line Of A Company The bottom line refers to the net earnings or profit a company generates from its business operations in a particular accounting period that appears at the end of the income statement. A company adopts strategies to reduce costs or raise income to improve its bottom line. read more. All the items are deducted from the revenue of the company to arrive at the net income.
The line items in between consist of the cost of goods soldThe Cost Of Goods Sold The cost of goods sold (COGS) is the cumulative total of direct costs incurred for the goods or services sold, including direct expenses like raw material, direct labour cost and other direct costs. However, it excludes all the indirect expenses incurred by the company.read more to manufacture those goods. Costs also include selling general & administration expenses.
The line item that comes next is depreciation, which is also part of the balance sheet.
Other items that are deducted to arrive at net income are interest expenses and taxes paid.

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For eg:
Source: Income Statement Basics (wallstreetmojo.com)

Income statement basic equation can be presented as

Basic Example of Income Statement

Let us try to understand the basics of income statements line items with the help of an example.

The income statement equation revenue- expenses= net income for company A is presented in the table below.

The revenue for the company is 50,000. After deducting all the expenses for the company, which includes the cost of goods, SG&A, depreciation expense, interest expense, and provision for income taxes, the net income comes up to be 500.

Basic Components of Income Statement

We have touched base on the basic components of the income statement in the previous sections. Let us now discuss each item in detail, which makes up the income statement of a company.

The basic components of the income statement are revenue, cost of goods sold, gross profitGross Profit Gross Profit shows the earnings of the business entity from its core business activity i.e. the profit of the company that is arrived after deducting all the direct expenses like raw material cost, labor cost, etc. from the direct income generated from the sale of its goods and services.read more, selling general and administrative expenses, earnings before interest tax and depreciation, depreciation expenses, operating profit, interest expenses, taxes, and net profit.

#1 – Revenue

It is the first line item of the income statement, and revenue is calculated by the volume for the product times the selling price. If a company has said five segments that sum up to make the total revenue, then the total of revenues for individual segments make up the total revenue. Revenue is also known as sales or turnover and used interchangeably in different countries. Sales is a very crucial figure to look at a company, for a company to expand its important for it to increase its sales over time and in a way, capture market share.

We note that Google (Alphabet) makes revenue primarily from three activities – advertising revenues from Google Properties, advertising revenues from Network Members Properties and Other revenues (includes play store, hardware, cloud services, licensing, etc.)

Google Income Statement - Geographic Segment

source: Alphabet (Google) SEC Filings

#2 – Cost of Goods Sold

The cost of goods sold is the cost of the raw materials required to manufacture products. These raw materials are sourced from different suppliers, and this cost consists of the bulk of costs required for a company to run a business and expand the business.

Cost of Goods Sold in Google primarily consists of traffic acquisition costs paid to Google Network Members for ads displayed.

source: Alphabet (Google) SEC Filings

#3 – Gross Profit

It is the difference between the revenue of a company and the cost of goods sold for the company.

Gross Profit = Revenues – Cost of RevenuesCost Of Revenues The cost of revenue is the total expense incurred from manufacturing to delivering a product or service to the customer. It reflects all direct costs associated with the product or service delivered and is reflected in a company's income statements.read more

source: Alphabet (Google) SEC Filings

Gross Profit (2016) = 90,272 – 35,138 = 55,134 million
Gross Profit (2015) = 74,989 – 28,164 = 46,825 million

#4 – Selling General and Administration Expenses

This line item consists of all the costs required to manufacture the products and also selling those products. These costs include the cost of factory expenses to marketing expenses. These costs also include personnel costs which are paid to all the employees are it factory works or administrative staff and others who get the salary from the company.

source: Alphabet (Google) SEC Filings

SG&A Expense (2016) = 10485 + 6985 = 17,470 million
SG&A Expense (2015) = 9047 + 6136 = 15,183 million

#5 – Depreciation Expense

Depreciation is the provision for a company to enable to buy back an asset when it is time for that asset to be scrapped. In the basic income statement, it is the expense for the period. Depreciation is a non-cash expenseNon-cash Expense Non-cash expenses are those expenses recorded in the firm's income statement for the period under consideration; such costs are not paid or dealt with in cash by the firm. It involves expenses such as depreciation.read more for the company.

source: Alphabet (Google) SEC Filings

Google’s Depreciation and Amortization Expense in 2016 was $3,523 and $1,456 million, respectively.
Google’s Depreciation and Amortization Expense in 2015 was $4,132 and $931 million, respectively.