An income statement will show you two things—how much a company earned for the year or quarter, and how much it spent in earning that revenue. When reading an income statement, start at the top, then go down each number and subtract the expenses until you reach the “bottom line,” which will tell you how much the company earned (or lost) over the period.
The first number is usually labeled gross revenue or net sales. This is the total amount of revenue brought in from the sale of product or services.
Next we have to subtract expenses. First is the cost of sales—what the company spent in creating goods and services. We also subtract operating expenses like research, marketing or administration, as well as depreciation of assets, which takes into account the wear and tear on long-term assets like machinery during the time period. And finally, we have to account for interest income and interest expenses, as well as taxes that need to be paid.
After all these expenses are deducted, we arrive at the bottom line—net profit or net losses, which will tell you whether the company made or lost money.
This is also where we get the all important earnings per share, or EPS. This is just the total net income of the company, divided by the number of outstanding shares. EPS tells you how much money shareholders would receive for each share of stock they own if the company distributed all of its net income for the period.