The income statement, line by line
6 min read · updated July 2, 2026
The income statement answers one question: did the company make money this period? It starts with sales at the top and strips off a layer of cost at every step until you reach profit at the bottom. That's why people call revenue "the top line" and net income "the bottom line."
But the order matters more than the arithmetic. Where a cost sits on the income statement tells you whether it's about running the business or about how the business is financed and taxed. Get that split and you understand not just this statement, but half of valuation.
Start at the top: revenue
Revenue (or "sales") is the total value of what the company sold in the period. One thing to lock in early: it's booked on an accrual basis. You record the sale when you earn it, not when the cash shows up. Ship the product in March, get paid in May, and the revenue is March revenue.
That gap between earning and collecting is the whole reason a separate cash flow statement exists. Profit on the income statement and cash in the bank are not the same number.
Revenue less COGS: gross profit
The first cost you subtract is cost of goods sold (COGS), the direct cost of producing what you sold: raw materials, the factory labor that built the units, the servers that host the software. What's left is gross profit.
Gross profit tells you how much you keep from each dollar of sales before any overhead. A software company might keep 80 cents; a grocery chain keeps a few pennies. Different businesses, different economics, and the gross margin shows it immediately.
Less operating expenses: EBIT
Next come the costs of running the company that aren't tied to a specific unit sold. The big ones:
- SG&A: selling, general and administrative. Sales salaries, marketing, the finance team, rent, the CEO's pay.
- R&D: research and development, the cost of building future products.
- D&A: depreciation and amortization, the non-cash charge that spreads the cost of long-lived assets over their useful life.
Subtract those from gross profit and you get operating income, also called EBIT (earnings before interest and taxes). This is the profit the core business generates, before you account for how it's funded or what the government takes.
EBIT is the most important subtotal on the statement. It's the profit of the business itself, stripped of financing choices and tax quirks. That's exactly why valuation runs on it: metrics like EV/EBIT and EV/EBITDA compare companies on their operations alone, ignoring whether one loaded up on debt and another didn't. See enterprise value vs. equity value for why that matters.
One note on D&A: sometimes it's buried inside COGS (the depreciation on a factory) rather than sitting on its own line. That's why analysts back it out to build EBITDA (EBIT plus D&A), so the two companies are compared on the same footing.
Below the line: interest and taxes
Here's the dividing line that trips up beginners. Everything above EBIT is operations. Everything below it is financing and taxes:
- Interest expense. Subtract the interest paid on the company's debt. Two identical businesses will show different net incomes purely because one borrowed money and one didn't. That's a financing difference, not an operating one.
- Taxes. Apply the tax rate to pre-tax income (EBIT minus interest) and subtract what's owed.
What remains is net income, the profit that actually belongs to shareholders.
Treating EBIT (operating income) and net income as if they're interchangeable, or forgetting that interest and taxes sit below operating income. They're not part of the business's operations. Interest is about the capital structure (how much debt you chose to carry), and taxes are about the jurisdiction and tax code. Two companies with identical operations can post very different net incomes just from a different debt load or tax rate. When an interviewer asks "what's the profitability of the business," they usually mean EBIT, not the bottom line. Know which subtotal answers the question.
Where net income goes
The bottom line doesn't just vanish. Net income flows two places: it's the starting point of the cash flow statement, and whatever isn't paid out as dividends gets added to retained earnings on the balance sheet. That's one of the three links that tie the statements into a single system, covered in walk me through the three statements.
The three margins interviewers ask about
A margin is just a profit line divided by revenue. Three of them come up constantly:
| Margin | Formula | What it tells you | | --- | --- | --- | | Gross margin | Gross profit / Revenue | Pricing power and unit economics | | Operating (EBIT) margin | EBIT / Revenue | How profitable the core business is | | Net margin | Net income / Revenue | What's left after everything |
Work a clean example. Revenue of $1,000, COGS of $400, so gross profit is $600 and the gross margin is 60%. Operating expenses of $350 leave EBIT of $250, a 25% operating margin. Subtract $50 of interest and you have $200 of pre-tax income; at a 25% tax rate you pay $50, leaving net income of $150, a 15% net margin.
Notice the margins fall at every step, because you're subtracting more cost each time. The distance between the operating margin and the net margin tells you how much debt and taxes are eating. A wide gap often means a heavy debt load.
Practice reciting the statement top to bottom in one breath: revenue, minus COGS, equals gross profit; minus operating expenses, equals EBIT; minus interest and taxes, equals net income. Then be ready for the follow-up: "which of those does valuation care about, and why?" The answer is EBIT and EBITDA, because they isolate the business from its financing. Delivering that sequence cleanly, and knowing exactly where the line between operations and financing sits, is the kind of fluency that separates a real answer from a memorized one in a Superday.
Glossary
New to the lingo? Every term used above, in plain English.
- Income statement
- The report that shows whether a company made a profit over a period, running from revenue at the top down to net income at the bottom.
- Net income
- A company profit after all expenses, interest, and taxes are taken out. It is the bottom line of the income statement, also called earnings.
- Accrual accounting
- Recording a sale when it is earned and a cost when it is incurred, not when the cash actually changes hands. It is why reported profit and cash can differ.
- COGS (Cost of Goods Sold)
- The direct cost of making the things a company sells, such as materials and factory labor. Revenue minus COGS is gross profit.
- Gross profit
- Revenue minus the direct cost of the goods sold (COGS). It shows how much a company keeps from each sale before paying for overhead, and dividing it by revenue gives the gross margin.
- SG&A
- Selling, general and administrative expenses. The overhead of running the business, like salaries, marketing, and rent, that is not tied directly to making the product.
- Operating income
- Profit from the core business after COGS and operating expenses, but before interest and taxes. It is the same thing as EBIT.
- EBIT (Earnings Before Interest and Taxes)
- A company operating profit before interest and taxes are taken out. It measures how much the core business earns regardless of how it is financed.
- D&A (Depreciation and Amortization)
- Spreading the cost of long-lived assets over the years they are used. Depreciation is for physical assets, amortization for intangible ones. Both are non-cash expenses.
- EBITDA
- Earnings Before Interest, Taxes, Depreciation, and Amortization. A rough proxy for a company’s operating cash profit, before financing and accounting choices.
- Retained earnings
- The running total of profits a company has kept over time instead of paying out to shareholders. Each period net income adds to it.
- Capital structure
- The mix of debt and equity a company uses to fund itself. More debt is cheaper but riskier, and finding the right balance affects both value and risk.
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