An income statement is a summary of a business’s operations for a given year. It summarizes the revenues, cost of sales and expenses to determine the income earned during the particular year.
Revenue – represents cash inflows, (or asset betterments) during the period, typically from delivering goods or services relating to the business’s principal operations.
Cost of goods sold – represents cash outflows (or incurred liabilities) directly attributable to the creation of revenues. Typically cost of goods sold are accumulated from direct materials, direct labour and overhead costs. Overhead costs represent the allocation of absorbed costs directly related to producing goods or services.
Gross profit – represents the total income earned from the principal operations, usually calculated as revenue minus cost of goods sold. Gross profit is an indication of the business’ ability to create income from its principal operation before deducting operating costs such as selling, administrative or research & development costs.
Operating costs or expenses – represents additional cash outflows (or incurred liabilities) that are not directly attributable to the creation of revenues.
Net income – represents the total income earned from operations over the period after deducting all expenses. The income is closed off, or moved to retained earnings on the balance sheet for future years.