How to Read an Income Statement | How Do Stocks Work?

An income statement shows how much a company sold over a period, what it spent to make those sales, and what was left over as profit. You read it from the top down: revenue first, then each layer of costs, until you reach net income and earnings per share at the bottom.

In short: the income statement (also called the statement of operations or profit and loss statement) covers a period of time, usually a quarter or a year. It starts with revenue, subtracts the cost of producing what was sold to get gross profit, subtracts running costs to get operating income, then adjusts for interest, other items and tax to arrive at net income. Dividing each line by revenue gives you margins, which are the most useful way to compare one year with another.

Where to find it

For a US-listed company, the income statement is in the annual report on Form 10-K (Part II, Item 8) and in each quarterly Form 10-Q. Both are free on the SEC’s EDGAR system. Canadian companies file annual and interim financial statements on SEDAR+, prepared under IFRS rather than US GAAP, but the structure is very similar. Our guide on how to read a 10-K explains where everything sits in the filing.

One thing to know before you start: the income statement is about accrual accounting. Revenue is recorded when it is earned, and costs are recorded when they are incurred, not when cash moves. That is why a profitable company can still run short of cash, a gap covered in how to read a cash flow statement.

The lines, from top to bottom

Line	What it means
Revenue (net sales)	What customers paid or owe for goods and services delivered in the period, after returns and discounts
Cost of sales (cost of goods sold)	The direct cost of producing what was sold: materials, manufacturing, and for services, the cost of delivering them
Gross profit (gross margin)	Revenue minus cost of sales
Operating expenses	Costs of running the business: research and development (R&D), and selling, general and administrative (SG&A)
Operating income	Gross profit minus operating expenses. Profit from the core business
Other income/expense	Interest earned or paid, investment gains and losses, currency effects
Income before taxes	Operating income plus or minus other items
Provision for income taxes	Tax expense recorded for the period (not necessarily the tax paid in cash)
Net income	What is left for shareholders
Earnings per share (EPS)	Net income divided by the weighted average number of shares

A worked example: Apple, fiscal 2025

Here is Apple Inc.’s consolidated statement of operations for its fiscal year ended September 27, 2025, as reported in its Form 10-K filed with the SEC on October 31, 2025. Figures are in millions of US dollars, except per-share amounts. We use Apple only because its statement is clean and widely available. Nothing here is a view on whether the stock is a good or bad buy.

	Fiscal 2025	Fiscal 2024
Net sales: Products	$307,003	$294,866
Net sales: Services	$109,158	$96,169
Total net sales	$416,161	$391,035
Cost of sales	($220,960)	($210,352)
Gross margin	$195,201	$180,683
Research and development	($34,550)	($31,370)
Selling, general and administrative	($27,601)	($26,097)
Operating income	$133,050	$123,216
Other income/(expense), net	($321)	$269
Income before taxes	$132,729	$123,485
Provision for income taxes	($20,719)	($29,749)
Net income	$112,010	$93,736
Diluted EPS	$7.46	$6.08
Diluted shares (millions)	15,005	15,408

Step 1: turn dollars into margins

Raw dollars are hard to compare across years or companies. Divide each profit line by revenue:

Gross margin: $195,201 ÷ $416,161 = 46.9% (fiscal 2024: $180,683 ÷ $391,035 = 46.2%)
Operating margin: $133,050 ÷ $416,161 = 32.0% (fiscal 2024: 31.5%)
Net margin: $112,010 ÷ $416,161 = 26.9% (fiscal 2024: 24.0%)

So out of every $100 of sales in fiscal 2025, about $53 went to producing what was sold, about $15 to R&D and overhead, about $5 to tax, and about $27 ended up as net income.

Step 2: look at the mix

The 10-K splits cost of sales between products ($194,116 million) and services ($26,844 million). That gives very different margins:

Products: ($307,003 minus $194,116) ÷ $307,003 = 36.8%
Services: ($109,158 minus $26,844) ÷ $109,158 = 75.4%

Apple’s MD&A section reports the same percentages. The lesson is general: a company’s overall margin is a blend, and a shift in the mix between a low-margin and a high-margin business can move the total even if neither business changes.

Step 3: compare growth rates line by line

Revenue grew $416,161 ÷ $391,035 minus 1 = 6.4%
Income before taxes grew $132,729 ÷ $123,485 minus 1 = 7.5%
Net income grew $112,010 ÷ $93,736 minus 1 = 19.5%
Diluted EPS grew $7.46 ÷ $6.08 minus 1 = 22.7%

Why did net income grow almost three times faster than revenue? Look at the tax line. Apple’s effective tax rate was 24.1% in fiscal 2024 and 15.6% in fiscal 2025. The fiscal 2024 figure included a one-time net income tax charge of about $10.2 billion after the Court of Justice of the European Union, in September 2024, upheld the European Commission’s 2016 State Aid decision about Apple’s past taxes in Ireland. Apple’s fiscal 2025 10-K attributes the lower 2025 rate to a $10.7 billion year-over-year decrease in the tax provision related to the State Aid decision, along with changes in unrecognized tax benefits.

In other words, most of the jump in net income came from a one-time item in the prior year, not from the business suddenly becoming far more profitable. Pre-tax income, which grew 7.5%, is a better read of the underlying trend here.

Step 4: why EPS grew faster than net income

EPS grew 22.7% while net income grew 19.5%. The difference is the denominator. Diluted shares fell from about 15,408 million to about 15,005 million, a drop of about 2.6%, because Apple repurchased stock. Fewer shares means each one gets a bigger slice of the same profit. Our article on stock splits and buybacks works through that effect, and the earnings per share glossary entry explains basic versus diluted EPS.

Questions to ask of any income statement

Is revenue growing, and from what? The segment and product tables in the 10-K tell you which parts of the business are driving it.
Are margins stable, rising or falling? A falling gross margin can mean rising input costs or price competition.
Are operating expenses growing faster than revenue? If so, operating margin will shrink.
Is there anything unusual below operating income? Big one-time gains, losses, or tax items can distort net income for a year.
How has the share count changed? Buybacks lift EPS. New share issuance dilutes it.

What can go wrong

Mistaking one-time items for a trend

As the Apple example shows, a single tax charge or a large gain from selling a division can swing net income by billions. Read the notes and the MD&A for anything described as one-time, nonrecurring, or related to a specific legal or tax event. Companies often present “adjusted” figures that remove these items, which can be useful, but those figures are chosen by management. Our guide on how earnings reports work covers GAAP versus adjusted numbers.

Treating profit as cash

Net income includes non-cash expenses such as depreciation and share-based compensation, and it records sales that customers may not have paid for yet. A company with growing profits and shrinking cash deserves a closer look at the cash flow statement.

Comparing companies that classify costs differently

What one company puts in cost of sales, another may put in operating expenses. Gross margins are most comparable within the same industry, and even then it is worth checking the accounting policy note. US companies report under US GAAP, Canadian public companies under IFRS, and some line items are labelled and grouped differently between the two.

Ignoring the period

A quarterly statement covers three months, an annual one twelve. Retailers, for example, often earn a large share of their annual profit in the holiday quarter, so comparing one quarter with the previous quarter can mislead. Compare a quarter with the same quarter a year earlier.

Forgetting the balance sheet

The income statement says nothing about how much debt a company carries or how much cash it holds. A company can show solid profits while carrying obligations that matter more. That side of the picture is in how to read a balance sheet.

The short version

Read an income statement from revenue down to net income, convert each profit line into a margin, and compare at least two years side by side. Then ask why each line moved. When net income grows much faster or slower than revenue, the reason is usually one specific line, such as tax, interest, or a one-time item, and finding it is most of the work.