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 period. 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 sold from revenues. Then the operating income is computed by deducting operating expenses 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)
Explanation of the Income Statement Formula
Under the single-step method, the formula for income statement calculation is done by using the following steps:
Step 1: Firstly, the total of all the revenue-generating sources has to be noted from the profit and loss statement.
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Step 2: Next, determine all the expenses pertaining to the relevant revenues.
Step 3: Finally, the formula for net income can be derived by deducting the expenses from the revenues, as shown below.
Net income = Revenues – Expenses
Under the multiple-step income statement method, the income statement equation calculation is done by using the following steps:
Step 1: First of all, determine the total revenues from the income statement.
Step 2: Next, determine the cost of goods sold from the profit and loss account. 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
Step 3: Next, the operating expenses are also collected from the income statement. Operating expenses primarily include selling expenses, 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
Step 4: Next, determine the non-operating items such as interest income, 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 report 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 Profit can be calculated as,
Gross profit = Net sales – 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 statements, 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 shareholders 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 earnings will have higher stock and bond prices.
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