Getting Started: The Income Statement

What Are Expenses?

A company's expenses include anything that the company is spending money on that's not an investment of some sort. Naturally, the greater our expenses, the less our net income will be. Some common income statement expenses include cost of goods sold (COGS), general and administrative expenses (G&A), depreciation expense and research and development expenses.

Expenses can be a good thing for some companies. Just as individuals want to maximize their deductions come tax time, companies whose value isn't derived from their income (usually those that are small and privately held) like to minimize their taxable income by spending money to grow the business. While the market value of a public company is ultimately affected by its income, companies want to maximize their net income by reducing expenses and getting as much revenue as they can.

Other Numbers

There are other, more advanced, items that show up on income statements too. Things like comprehensive income and extraordinary items can be material on the profit or loss a company reports. Because both of these are out of the realm of "ordinary" business (and often don't recur), they shouldn't be counted for or against a company's income the same way that operating items would be.

How to Analyze Income Like a Pro

Net income (income after taxes) is often referred to as a company's "bottom line." This is both because it's such an important number, and, well, because it's usually the bottom line of the income statement. But once you have this all-important number, what do you do with it? How do you know what it's saying? What's respectable, and what's a red flag?

There are a few really important numbers and ratios that come from the income statement. Among them are the EPS, P/E ratio and margins.