NEW YORK (TheStreet) -- Making a profit: It's the hallmark of a successful business. So whether you're thinking about buying stock in a company, or you want to make sure that a current investment is still a good one, the income statement is a really important thing to look at. Now let's take a look at how to make the income statement make a profit for you.
What's an Income Statement?First of all, the question should probably be "What is income?" For a company, as with an individual, net income is "take-home" pay. That means it's the money that a company records as profit at the end of "the day." The income statement is the financial statement that's used to get to that oh-so-important number. An income statement is also sometimes referred to as a profit and loss statement (P&L) because the net income can either be a profit (positive net income) or loss (negative net income). The term "profit and loss statement" generally refers to something used by managers for internal accounting, not for the financial statements that investors are interested in. As far as the SEC is concerned, it's called an income statement, so that's what we'll call it. Again, a company's ability to turn a profit is paramount. Who wants to invest in a company that's losing money? Because of this, net income, the number at the bottom of the income statement ("the bottom line," see earnings), can have a dramatic effect on a company's stock price. Why? Revenues - Expenses = Profit! In essence, companies get their profit (or income) by taking their revenues (money they bring in) and subtracting their expenses (money they spend). Despite the complexity in many large companies' income statements, the same basic principle applies: Revenues - Expenses = Profit. This is generally also the way income statements are set up. There are two basic types of income statements, the single-step and multi-step. Singe-step income statements simply follow the equation of revenue minus expenses equals profit. For example:
A multi-step income statement is a little bit more complex in that it differentiates between operating and nonoperating activities. Operating activities are any activities that are core to a company's business. For example, if you own a clothing store, your clothing sales, store rent and manufacturing costs would all be operating activities. Nonoperating activities are anything else (this typically includes things like investment income or losses) that affects your store's income. Most public companies use a multi-step income statement. To see a breakdown of a multi-step income statement, take a look at " The Finance Professor: How to Read an Income Statement."