The Income Statement
A line-by-line walk through STU Corp's income statement, from revenue to earnings per share, and how to compare two years to see what really changed.
The short version
The income statement starts with revenue and subtracts costs in steps: cost of goods sold to reach gross profit, operating expenses to reach operating income, then interest and taxes to reach net income. Dividing net income by the number of shares gives earnings per share, reported in basic and diluted versions. Comparing two years line by line shows not just whether profit grew, but why, and whether each share's slice grew as fast as the company's profit.
By the end of this lesson, you'll be able to
- Read each line of an income statement and explain what it measures
- Calculate earnings per share and an effective tax rate
- Compare two years to see which lines drove a change in profit
Why this matters
The income statement is the statement people quote most: revenue, profit, earnings per share. Costs, Margins, and Profitability used it to follow a dollar of sales down to profit. This lesson reads every line, and then does what investors do most often with an income statement: compares one year with the last.
| Line item | This year | Last year |
|---|---|---|
| Revenue | 400 | 350 |
| Cost of goods sold | (200) | (180) |
| Gross profit | 200 | 170 |
| Research and development | (20) | (18) |
| Selling, general, and administrative | (100) | (90) |
| Operating income | 80 | 62 |
| Interest expense | (6) | (6) |
| Income before taxes | 74 | 56 |
| Income tax | (16) | (12) |
| Net income | 58 | 44 |
| Average shares outstanding (millions) | 20.0 | 19.6 |
| Earnings per share | $2.90 | $2.24 |
STU Corp is fictional. Amounts in $ millions, except per-share amounts. Numbers in parentheses are subtracted.
Line by line
- Revenue. What customers paid for STU Corp's systems and cartridges, after returns and discounts. Also called sales, or the top line.
- Cost of goods sold. The direct cost of making what was sold: materials, factory wages, and running the factory.
- Gross profit. Revenue minus cost of goods sold.
- Research and development. Designing better filters and cartridges.
- Selling, general, and administrative. Marketing, sales staff, warehouses, head office, and everything else it takes to run the company.
- Operating income. The profit from the core business, before the company's financing choices and taxes.
- Interest expense. The cost of STU Corp's debt.
- Income tax. STU Corp's tax for the year.
- Net income. What's left for shareholders: the bottom line.
The wear and tear on STU Corp's equipment, called Depreciation. An expense that spreads the cost of a long-lasting asset, such as a machine or building, over the years it's used. Glossary, spreads the cost of long-lasting assets over the years they're used.1 STU Corp recorded $25 million of it this year. It doesn't get its own line here: it's included within cost of goods sold and SG&A. Some companies show it separately, so it's worth checking where it sits.
The rest of this lesson is for members
Still to come in this lesson: Earnings per share, Comparing two years, the key takeaways, and 2 quiz questions with explanations.
Membership opens every lesson in the curriculum, the capstone projects, the interactive tools, and the members-only channels in the Hyperion Entities Discord. The first lesson of every module stays free.
Go deeper
- Revenue RecognitionFinancial Statement Analysis in Depth (depth track)
- Stock-Based CompensationFinancial Statement Analysis in Depth (depth track)
- Earnings Multiples: P/E and PEGPart 4: Research and Valuation
Notes and sources
- U.S. Securities and Exchange Commission. Beginners' Guide to Financial Statements. Checked 2026-09-30. Back to text
- U.S. Securities and Exchange Commission. Small Business Resources: Glossary (Earnings per share). Checked 2026-10-01.