Income statement formula consists of the 3 different formulas in which the first formula states that gross profit of the company is derived by subtracting Cost of Goods Sold from the total Revenues, second formula states that Operating Income of the company is derived by subtracting Operating Expenses from the total gross profit arrived and the last formula states that the Net income of the company is derived by adding the Operating Income with the net value of the non-operating items of the company.
What is the Income Statement Formula?
The term “income statement” refers to one of the three primary financial statements that the company uses to summarize its financial performance over the reporting periodReporting PeriodA reporting period is a month, quarter, or year during which an organization's financial statements are prepared for external use uniformly across a period of time in order for the general public and users to interpret and evaluate the financial statements.read more. The income statement is also referred to as the statement of earnings or profit and loss (P&L) statement. This income statement formula calculation is done by a single step or multiple steps process.
In the case of a single step, the income statement formula is such that the net income is derived by deducting the expenses from the revenues. Mathematically, it is represented as,
Net Income = Revenues – Expenses
In the case of multiple steps, first, the gross profit is calculated by subtracting the cost of goods soldCost Of Goods SoldThe 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 from revenues. Then the operating income is computed by deducting operating expensesOperating ExpensesOperating expense (OPEX) is the cost incurred in the normal course of business and does not include expenses directly related to product manufacturing or service delivery. Therefore, they are readily available in the income statement and help to determine the net profit.read more from gross profit, and finally, the net income calculation is done by adding operating income and non-operating items.
Income Statement Formula is represented as,
- Gross Profit = Revenues – Cost of Goods Sold
- Operating Income = Gross Profit – Operating Expenses
- Net income = Operating Income + Non-operating Items
The income statement formula under multiple-step method can be aggregated as below,
Net income = (Revenues + Non-operating items) – (Cost of goods sold + Operating expenses)
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For eg:
Source: Income Statement Formula (wallstreetmojo.com)
Explanation of the Income Statement Formula
Under the single-step method, the formula for income statement calculation is done by using the following steps:
- Firstly, the total of all the revenue-generating sources has to be noted from the profit and loss statement.
- Next, determine the cost of goods sold from the profit and loss accountProfit And Loss AccountThe Profit & Loss account, also known as the Income statement, is a financial statement that summarizes an organization's revenue and costs incurred during the financial period and is indicative of the company's financial performance by showing whether the company made a profit or incurred losses during that period.read more. The cost of goods sold primarily includes raw material costs. Now, in this step, the gross profit can be calculated by deducting the cost of goods sold from the revenues. It is as shown below:
Gross profit = Revenues – Cost of goods sold
- Next, the operating expenses are also collected from the income statement. Operating expenses primarily include selling expensesSelling ExpensesThe amount of money spent by the sales department on selling a product is referred to as selling expenses. This includes expenses incurred on advertising, distribution and marketing. Because it is indirectly related to the production and delivery of goods and services, it is classified as an indirect cost.read moreThe amount of money spent by the sales department on selling a product is referred to as selling expenses. This includes expenses incurred on advertising, distribution and marketing. Because it is indirectly related to the production and delivery of goods and services, it is classified as an indirect cost.read moreThe amount of money spent by the sales department on selling a product is referred to as selling expenses. This includes expenses incurred on advertising, distribution and marketing. Because it is indirectly related to the production and delivery of goods and services, it is classified as an indirect cost.read more, administrative expenses, etc. Now, in this step, the operating income can be calculated by deducting operating expenses from the gross profit, as shown below.
Operating income = Gross profit – Operating expenses
- Next, determine the non-operating items such as interest incomeInterest IncomeInterest Income is the amount of revenue generated by interest-yielding investments like certificates of deposit, savings accounts, or other investments & it is reported in the Company’s income statement. read moreInterest Income is the amount of revenue generated by interest-yielding investments like certificates of deposit, savings accounts, or other investments & it is reported in the Company’s income statement. read moreInterest Income is the amount of revenue generated by interest-yielding investments like certificates of deposit, savings accounts, or other investments & it is reported in the Company’s income statement. read more, one-time settlements, etc. Finally, the net income calculation is done by adding the net of non-operating items (= non-operating income – non-operating expense) to the operating income, as shown below.
Net income = Operating income + Non-operating items
Example of Income Statement Formula (with Excel Template)
Let us take the real-life example of Apple Inc.’s annual reportAnnual ReportAn annual report is a document that a corporation publishes for its internal and external stakeholders to describe the company's performance, financial information, and disclosures related to its operations. Over time, these reports have become legal and regulatory requirements.read more as on September 29, 2018. Fill up the blank spaces based on the following available information.
Below is data for the calculation of Apple Inc.’s annual report.
Gross Profit
Therefore, Gross ProfitGross ProfitGross 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 can be calculated as,
Gross profit = Net salesNet SalesNet sales is the revenue earned by a company from the sale of its goods or services, and it is calculated by deducting returns, allowances, and other discounts from the company's gross sales.read more – Cost of goods sold
= $215,639 Mn – $131,376 Mn
Gross Profit for 2016 will be –
Gross Profit for 2016 =$84,263
Operating Income
Therefore, Operating Income can be calculated as,
Operating income = Gross profit – Operating expenses
= $84,263 Mn – $10,045 – $14,194
Operating Income for 2016 will be –
Operating Income for 2016 = $60,024
Net Income
Therefore, Net Income can be calculated as,
Net income = Operating income + Non-operating items
=$60,024 Mn + $1,348 – $15,685
Net Income for 2016 will be –
Net Income for 2016 =$45,687
Similarly, we can calculate gross profit, operating income, and net income for 2017 & 2018, and also, you can refer to the below given excel template for the same.
Relevance and Use of Income Statement Formula
The understanding of the income statement formula is very important for people who are interested in actively trading in the stock market or analyst who investigates the financial performance of a particular company. They are required to know how to read financial statementsFinancial StatementsFinancial statements are written reports prepared by a company's management to present the company's financial affairs over a given period (quarter, six monthly or yearly). These statements, which include the Balance Sheet, Income Statement, Cash Flows, and Shareholders Equity Statement, must be prepared in accordance with prescribed and standardized accounting standards to ensure uniformity in reporting at all levels.read more, including the income statement.
One should note that net income is not the same as cash profit. Nevertheless, the ability of a company to generate healthy net income over a long period can be seen as a positive for it in stock and bond prices because it is the net income that compensates the shareholdersThe ShareholdersA shareholder is an individual or an institution that owns one or more shares of stock in a public or a private corporation and, therefore, are the legal owners of the company. The ownership percentage depends on the number of shares they hold against the company's total shares.read more for the risks that they have taken. In case a company is unable to generate enough profit, then the value of the stock is likely to plummet. In short, a company with healthy earningsEarningsEarnings are usually defined as the net income of the company obtained after reducing the cost of sales, operating expenses, interest, and taxes from all the sales revenue for a specific time period. In the case of an individual, it comprises wages or salaries or other payments.read more will have higher stock and bond prices.
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