Finance for Newbies: The Income Statement

We all know that business sell goods and services to people for a price. In the process, they incur costs like cost of purchasing raw material, salaries to employees, etc. If the revenue earned is more than the costs incurred, the company makes a profit; if the costs are more than what is earned, the company makes a loss.

The Income statement or the Profit or Loss statement summarizes the revenues generated and costs incurred during a specific period of time. Irrespective of the format used, here's how the net profit / loss is computed in an income statement:

Net sales (total revenues)
Less Cost of goods sold ( raw material, labor, etc.)
------------------------------------------------
Gross Profit
Less Operating costs ( administrative expenses, selling expenses, etc.)
--------------------------------------------------------------------
Earning Before Depreciation, Interest, and Tax (EBDIT)
Less Depreciation
--------------------------------------------------------
Earnings Before Interest and Tax (EBIT)
Less Interest to bond holders
-----------------------------------------
Profit Before Tax (PBT)
Less Taxes
------------------------
Profit After Tax (PAT)
Less Dividend to shareholders
-----------------------------
Retained Earnings
----------------------------------
----------------------------------

Here's a link to a sample income statement.