What is the Income Statement Formula?

The term “income statement” refers to one of the three primary financial statements 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 single 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 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 SoldOperating Income = Gross Profit – Operating ExpensesNet income = Operating Income + Non-operating Items

The income statement formula under the multiple-step method can be aggregated as below,

Net income = (Revenues + Non-operating items) – (Cost of goods sold + Operating expenses)

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Explanation of the Income Statement Formula

Example of Income Statement Formula (with Excel Template)

  • Firstly, the profit and loss statement has to note the total of all the revenue-generating sources. Next, determine the cost of goods sold from the profit and loss account. The cost of goods sold primarily includes raw material costs. 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 expenses, administrative expenses, etc. 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 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

Gross profit = Revenues – Cost of goods sold

Operating income = Gross profit – Operating expenses

Net income = Operating income + Non-operating items

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,

= $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,

=$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

Understanding the income statement formula is very important for people interested in actively trading in the stock market or analysts who investigate a particular company’s financial performance. Therefore, they must 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 its 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 they have taken. Conversely, if a company cannot 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.

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

  • FormulaFormulaNon-Operating Income, also called Peripheral Income, is the capital amount that a business earns from non-core revenue-generating activities. The examples include profits/losses from a capital asset sale or Foreign Exchange Transactions, Dividend Income, Lawsuits losses, & Asset Impairment losses, etc. read more of Non-Operating Income Of Non-Operating IncomeNon-Operating Income, also called Peripheral Income, is the capital amount that a business earns from non-core revenue-generating activities. The examples include profits/losses from a capital asset sale or Foreign Exchange Transactions, Dividend Income, Lawsuits losses, & Asset Impairment losses, etc. read moreIncome Statement BasicsIncome Statement BasicsThe income Statement is a comprehensive report that provides a basic summary of the company’s revenue over a specific time period. Revenue is always shown at the top of income statements, and this is referred to as the company’s top line. The net income of the firm is listed at the bottom.read morePurpose of Income StatementPurpose Of Income StatementAn income statement is prepared to summarize all revenues and expenses over time in order to determine the company’s profit or loss and measure its business activity over time, based on the needs of the income statement’s users.read moreVariable Costing Income StatementVariable Costing Income StatementVariable costing income statement is one where all variable expenses are subtracted from revenue which results to contribution margin. From this all fixed expense are then subtracted to arrive at the net profit or loss for the period. It is useful to determine a proportion of expenses that actually varies directly with revenues.read more