Income Statement Formula

Table of Contents

• What is Income  Statement Formula?
• Example 

What is Income Statement Formula?

The term “income statement” refers to one of the three primary financial statements that are used to summarize the financial performance of a company over the entire reporting period. The income statement is also referred to as the statement of earnings or profit and loss (P&L) statement. The income statement formula calculation is done by a single step or multiple steps.

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 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 source has to be noted from the profit and loss statement.

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. Cost of goods sold primarily includes raw material cost. Now, in this step, the gross profit can be calculated by deducting the cost goods sold from the revenues 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 expense, administrative expense 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 on the basis of the following available information.

Below is data for 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 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.

It is to be noted 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 of time can be seen as a positive for it is 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.

Recommended Articles

This has been a guide to Income Statement Formula. Here we discuss how to calculate Income Statement items like gross profit, operating income & net income along with the practical examples and downloadable excel sheet. You can learn more about accounting from the following articles –

• Variable Costing | Definition
• Financial Statements Objectives
• Non-Operating Income Formula
• Components of Cost of Goods Manufactured (COGM)
• Profit and Loss Statement Template
• Income Statement Overview
• Main Purpose of Income Statement
• Calculate Variable Costing Income Statement
• Meaning of Comparative Income Statement