The Income Statement

An income statement looks at the profitability of a business. It is a record of the earnings of a business over a period of time, usually a year or quarter. There are five components to an income statement:

• Revenues
  
  
• Costs of goods sold
  
  
• Operating expenses
  
  
• Interest expenses
  
  
• Taxes
  
  
  

The net income of your business can be calculated from these components in three steps:

1. Revenues - Cost of Goods Sold (COGS) = Gross profit
   
   
2. Gross profit - operating expenses = Operating Income, or Earnings before interest and taxes (EBIT)
   
   
3. EBIT - interest expenses - income tax = Net income
   
   
   

Revenues are simply your total sales for the time period set. If this is one year, you would use your total annual sales.

The Cost of Goods Sold (COGS) is the cost of producing or purchasing your final product. COGS are direct is costs related to what being sold. They are sometimes referred to as the cost of revenue or sales. The COGS can be separated into fixed costs of goods sold and variable costs of goods sold. Fixed costs of goods sold are not directly tied to the volume of sales, while variable costs of goods sold are. For example, the cost of buying cloth to make shirts would be a variable cost, because the more shirts that you sell, the more cloth you need.