The income statement explained

Apple EarthThe income statement is a financial statement that measures a company’s profitability.  It is sometimes called:

  • Statement of income
  • Statement of earnings
  • Statement of operations
  • Profit and loss statement

The basic formula for the income statement is:

Revenuesexpenses = net income

Income statements are usually prepared using the accrual basis.  The largest expense on an income statement is usually cost of goods sold.  Other typical expenses include:

  • selling, general and administrative expense
  • research and development expense
  • depreciation expense
  • interest expense
  • provision for income taxes (i.e. income tax expense)

A corporation reports earnings per share at the bottom of its income statement.

Here is Apple’s most recent income statement: (Go to page 43.)

[Image: Apple Earth by JD Hancock, on Flickr]

4 thoughts on “The income statement explained

    • Tony and Ed’s brilliant blog post isn’t meant to trash Apple for reporting this. Apple’s balance sheet reports deferred tax assets because that’s what the rules require the company to do.

      That said, while companies must report these, it is questionable whether or not deferred tax assets and liabilities really are assets and liabilities. Furthermore, financial accounting for deferred taxes is extremely complex and difficult to understand, and I’m not sure most people would understand what these items really say about a company.

      Thanks for the question.

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