## Why Investors Need to Read and Understand the Income Statement

Many people see financial statements as difficult and boring, but the truth is that the **Income Statement (P&L Statement)** tells a story about the business that goes beyond what you might think. It’s not just numbers; it’s a history of the company’s successes and challenges.

## What is the Income Statement and How It Shapes the Future of the Business

**P&L Statement or Income Statement** is a document that shows the performance of a business over a specific period. It indicates how much money the business has earned, how much it has spent, and what profit (or loss) remains.

The simple equation is:
**Total Revenue – Total Expenses = Profit (or Loss)**

Once you understand this calculation, you can see the overall picture of the business more clearly.

## How to Assess a Business’s Profitability

The income statement breaks down profit into several levels, each telling a different story.

### **Gross Profit is the Key to Analysis**
Gross Profit (= Revenue – Cost of Goods Sold) indicates how much the business can set prices above costs. If gross profit is healthy, it shows the business has profit potential.

### **Operating Profit Shows Management Efficiency**
After deducting general expenses such as advertising, rent, and salaries, it reveals whether the operations are truly successful.

### **Net Income Is the Business’s Final Goal**
After deducting all expenses, including taxes and interest, the remaining figure is **Net Income**, the true profit of the business.

## Where Revenue Comes From and How It Is Used

### Components of Revenue
- **Main Revenue (Operating Revenue)** comes from selling products or services.
- **Additional Revenue (Non-Operating Revenue)** includes bank interest, investment dividends, rental income.

### Components of Expenses
- **Production Costs** raw materials, labor, energy.
- **Selling Expenses** advertising, marketing, transportation.
- **Administrative Expenses** rent, training, management salaries.

## Two Formats of Presenting the P&L

### **1. Report Form (**
Arranged from revenue → expenses → net profit in a straightforward order, easy to read and understand.

**Advantages:**
- Easy to read and quick to grasp
- Highlights the overall picture
- Suitable for preliminary analysis

) **2. Account Form ###**
Arranged as a T-account, with expenses on the left and revenue on the right, giving a more formal look.

**Advantages:**
- Clearer and more comprehensive
- Accepted by government agencies and the SEC
- Ideal for consulting with experts

## How to Read an Income Statement Effectively

( **Step 1: Check the Period**
Make sure whether this statement is for a quarter or a year, as income statements can be prepared for different periods.

) **Step 2: Look at the Overall Profit or Loss**
When revenue > expenses = profit
When revenue < expenses = loss

### **Step 3: Examine Revenue Sources**
See where the income comes from, whether it’s stable or relies heavily on a single project.

### **Step 4: Analyze Expenses**
Check where the money is going, identify any abnormal costs, and see if there are opportunities to reduce expenses.

## Why Gross Profit Is a Key Indicator

Most people focus only on Net Income, but **gross profit is often the starting point that reveals the true picture**. If gross profit is low, even if Net Income looks good, you should be cautious because it might mean the company is cutting other expenses to hide underlying issues.

## Summary: Why is the P&L Statement Important for Investment

The income statement is not just numbers; it’s a tool that often indicates whether a business is performing well. Understanding how to read and analyze it will help you make smarter investment decisions.

However, investment decisions should not rely solely on the income statement. You should also consider other factors such as management team, growth potential, competitive position, and industry trends to make well-founded choices.