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Learn/3-Statement Modeling/Module 2
2.1·6 min read

Revenue to Net Income

The income statement is a waterfall: start at revenue, subtract costs in order, and arrive at net income.

By the end you can
  • ✓Walk the income statement top to bottom
  • ✓Compute net income from its components
LineMeaning
RevenueSales recognized in the period
Less: COGSDirect cost of the goods/services sold
= Gross profitWhat's left to cover overhead
Less: operating expensesS&M, R&D, G&A overhead
= (operating income)Profit from operations
Less: interestCost of debt financing
= Pre-tax income (EBT)Profit before taxes
Less: taxesIncome tax
= The bottom line
Worked example · Compute net income
Given
  • •Revenue 500, COGS 300, OpEx 80, interest 20, tax rate 25%
Solution
  1. 1.
    500−300−80=120500 - 300 - 80 = 120
  2. 2.Pre-tax income
    120−20=100120 - 20 = 100
  3. 3.
    100×(1−0.25)=75100 \times (1 - 0.25) = 75
Answer

= 75. Each subtotal (gross profit, , EBT) is a checkpoint worth labeling in a model.

Check yourself

EBIT is 200, interest is 50, and the tax rate is 20%. What is net income?

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How the Statements Link
Next · 2.2 →
Projecting the Income Statement