The Income Statement
The Income Statement—Measuring a Firm’s Profits and Losses
The income statement reports the firm’s net income or net loss (profit or loss) results obtained
from operating the business over a set period of time, typically a month, quarter, or year. Other
common names for the income statement are the profit and loss statement (P&L) and the
earnings statement. The income statement begins by identifying all sources of revenue for the
period and then sequentially subtracts all the costs that were incurred in generating that revenue.
Normally, the income statement comprises five major categories, one related to revenue and four
related to costs and expenses as shown below:
1. revenues—the proceeds from selling the product(s) or services(s)
2. costs—the costs of producing or acquiring the product(s) or service(s)
3. period expenses—the expenses incurred in marketing, administration, and R&D
4. interest—the financing costs of debt financing
5. taxes—the taxes owed based on a firm’s taxable income
The Balance Sheet—Measuring a Firm’s Book Value
The balance sheet provides a snapshot of the firm’s financial position at a specific time and
presents the firm’s asset holdings, liability obligations, and owners’ residual equity as of that
time. It is important to recognize that the balance sheet is an algebraic equation that relates and
balances the three components—assets, liabilities, and equity.
