How to Read an Income Statement
  • Wendy Ni

How to Read an Income Statement

Importance of the Income Statement (aka Profit & Loss Statement)

Understanding an income statement is essentials for anyone that analyzes the financial profitability and future growth of a company. Before we go deeper on how to read the P&L statement, the following is the basic summary of it. The reason why we say also known as profit and loss statement, is because it measures profitability (gross, operating, pretax, and after tax) and not cash flow (Investopedia).


Trends

When we take a look at an income statement, typically it summarizes the company's revenues and expenses over a period, whether it is over a span of multiple months or even years. By having this, we will be able to compare trend over time.


Gross Profit Margin

It's important that businesses have a high profit margin. If your business is service based, the goal is anywhere between 65%-85%.


Operating Expenses

When we get to this section, there is no right or wrong answer because it solely depends on the company, business culture, and goals. We can say, for example, if a company owner really wanted to have a nice big office so when their clients come in it would feel professional. That means the owner invested in their facility, therefore a company expense.


Net Income

This is the result of the gross profit minus all of the operating expenses. So, after all of this - the net income should be on the higher end of 15%. However, if it is below 15%, that is not a good sign. Something went wrong whether spending too much on unnecessary expenses or not bringing in enough revenue or gains to support the needed expenses.


For a more visual tutorial and explanation, here is a video. We go through not only on how to ready the income statement, but also:

  • How to use the income statement

  • How NOT to use the income statement

  • What the CEO should focus on

  • How to create the report in QuickBooks


Here is another blog where we continue the Accounting for CEOS. In this segment, we have the conversation of how to read the cash flow statement, including how to access it on QuickBooks Online.


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