Lesson 1 of 5 · 3 min · Reports

The income statement

From every dollar of sales down to the profit that is left. Read it top to bottom.

1. Every company reports three statements. The income statement shows one year of business: what came in, what it cost, and what was left. It reads from top to bottom.

2. The top line is sales, also called revenue. Lemon Co sold $12.5 million of lemonade. Take off what the lemons, sugar and cups cost, $5 million, and you get the gross profit: $7.5 million.

3. Next come wages, rent and everything else it takes to run the stands, $5 million. What remains is operating profit, or EBIT: $2.5 million. This is what the business itself earns.

4. One of those costs is special. Depreciation spreads the price of each stand over the years it lasts. Lemon Co counts $0.8 million of it, although no cash left the till this year.

5. Then the lenders get their interest, $0.5 million, and the government its tax, $0.5 million. The bottom line is net profit: $1.5 million, or $1.50 for each share.

6. Read it as a funnel. Each line shows who took a share before the owners. What is left at each step, as a share of sales, is a margin from the lesson on margins: 60%, 20%, 12%.