Income Statement

Concept

The income statement measures a company's financial performance over a specific period (quarter or year). It shows revenues earned, expenses incurred, and the resulting profit or loss. Unlike the balance sheet (a snapshot), the income statement is a flow statement—it captures activity between two points in time. The bottom line, net income, flows directly to retained earnings on the balance sheet and is the starting point for the cash flow statement.

Intuition

The income statement answers one question: How much did the company earn from operations this period?

It's built on accrual accounting—revenues are recognized when earned, expenses when incurred, regardless of cash movement. This creates timing mismatches with cash flow.

Bankers care because net income drives (P/E), (interest coverage), and (EPS growth). But experienced analysts know net income is just an accounting construct—riddled with estimates, timing choices, and non-cash items. That's why you always triangulate with the cash flow statement.

Components

Interview Script

The income statement measures a company's financial performance over a specific period by showing revenues, expenses, and the resulting profit or loss. It's built on accrual accounting, meaning revenues are recognized when earned and expenses when incurred, regardless of when cash actually changes hands. The bottom line—net income—flows to retained earnings on the balance sheet and serves as the starting point for the cash flow statement, which is why you always analyze both together since net income includes non-cash items and timing differences.