An income statement is a financial statement that shows different measurements of revenues, expenses, and profits for a firm over a specified period of time. At the top of an income statement is net sales, followed by calculations involving operating costs, interest, and taxes. The income statement also typically shows net income as well as information regarding dividends, retained earnings, and earnings per share.

The following is an example of an income statement for a fictional company over the course of a two year period.

Income Statement for Years Ending December 31 (Note: Amounts listed in millions of dollars)

	Year 2	Year 1
Net Sales	$3,100	$2,800
Operating costs except for depreciation and amortization	2,600	2,510
Depreciation and amortization	100	90
Total operating costs	$2,700	$2,600
Operating income (EBIT)	$400	$200
Less interest	80	60
Earnings before taxes (EBT)	$320	$140
Taxes (20.00%)	64	28
Net income	$256	$112
Total dividends	$75	$70
Addition to retained earnings	$181	$42

Most financial analysts will pay close attention to operating income (EBIT), which is calculated as sales revenues minus operating costs, that is derived from regular core business operations.

Note that although operating income and net income both increased in this example, this need not always be the case. If debt, or interest on debt, increases significantly then this can cause a decrease in net income even if operating income rises.

Further recall that depreciation (the estimated dollar cost of capital and tangible assets used during production) and amortization (the estimated decline of intangible assets) are both noncash chargers against income and are typically grouped together on the income statement. Because these are noncash charges, many analysts will look at earnings before interest, tax, depreciation, and amortization (EBITDA) when analyzing the amount of cash generated by a company.

One way in which the income statement differs from the balance sheet is the time period. The balance sheet captures assets and liabilities of a company at a single moment in time, while the income statement shows data aggregated over an extended time period, such as month, quarter, or year. However, the balance sheet and the income statement are related in that the net income that is not paid out as dividends (calculated on the income statement) is added to the cumulative retained earnings for a company, which is shown on the balance sheet.

True or False: If operating income (EBIT) and interest expenses both increase, then net income must increase as well.

True

False