Course 106: A Tour through the Income Statement
In this course
1 Introduction
2 Revenues
3 Expenses
4 Profit

Cost of Sales. Also known as cost of goods sold, this number represents the expenses most directly involved in creating revenue, such as labor costs, raw materials (for manufacturers), or the wholesale price of goods (for retailers). Large companies that combine manufacturing with services (IBM IBM, for example) will sometimes break down this number into cost of goods sold and cost of services.

Gross Profit. This number is equal to revenues minus cost of sales. It doesn't appear on all income statements, but it can easily be calculated when it doesn't.

Selling, General, and Administrative Expenses (SG&A). This number, also known as operating expenses, includes items such as marketing, administrative salaries, and, sometimes, research and development. These more peripheral expenses are still necessary for the company's everyday operations and are particularly necessary for the company to grow. Sometimes marketing or research and development are broken out as separate line items.

Depreciation and Amortization. When a company buys an asset intended to last a long time, it amortizes the cost of that asset on its income statement; that is, it spreads out the cost over a period of years meant to represent the useful life of the asset (up to 40 years), subtracting part of this cost from its earnings each year. This number is usually included in operating expenses, but only occasionally is it broken out separately on the income statement. It’s always included in the cash-flow statement, though, so you can look there in order to see how much a company’s net income was affected by non-cash charges such as depreciation.

Nonrecurring Charges/Gains. Often, companies will have a one-time charge resulting from a restructuring or an acquisition. Sometimes, they will have a one-time gain resulting from the sale of a subsidiary. Most often, these charges are included with operating expenses, but sometimes they appear further down, after interest expense.

Operating Income. This number is equal to revenues minus cost of sales and all operating expenses. It appears as a separate line item on many, but not all, income statements. Theoretically, it represents the profit the company made from its actual operations, as opposed to such things as interest income and one-time charges. In practice, companies often include nonrecurring expenses (such as write-offs) in figuring operating income, and it is necessary to look closely at the income statement to spot such cases.

Interest Income/Expense. Sometimes interest income and interest expense are listed separately, and sometimes they are combined into net interest income (or expense, as the case may be). In either case, this number represents interest the company has paid on bonds it has issued or received on bonds it owns. Some income statements have a separate line item for income after interest expenses but before taxes.

Taxes. Tax information is usually the last expense listed before net income.

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