Part 3 · Income statement: a report card for a year of business · Lesson 12
The income statement is a report card for a year of business
How much did it sell, how much did it spend, and how much was left over in a year? Read the business results through a five-step staircase from revenue down to net income.
QToday's question
The news says 'record revenue', yet the same company's 'profit was cut in half'. How do revenue and profit differ?
Revenue is 'the amount sold', and profit is 'the amount left after selling'. In between is a staircase where ingredient costs, salaries, rent, interest, and taxes come out one after another. The income statement is the table that writes down that staircase on one page.
MAPLearning map for this lesson
We build it up in three steps. At the end of each step, a 'Quick check' lets you test your understanding before moving on.
In Lesson 1 you learned that the income statement is a one-year 'video' and the balance sheet is a year-end 'photo'. From Lesson 6 to Lesson 11 we took that photo apart, and in Lesson 9 we saw the KRW 1.2 billion of net income flow into retained earnings. Now let's play the video from the start to see how that KRW 1.2 billion was made. The 'earnings' in Learn (Economics) Lesson 1, where stock price = earnings × multiple, come from exactly this table.
- STEP 1 · Basic conceptsA table of one year of business
Explain that the is a record of a 'period', and its basic structure of subtracting expenses from revenue to get profit.
- STEP 2 · Understanding how it worksThe five-step staircase of profit
Distinguish what is subtracted to get , , , and .
- STEP 3 · Real-world applicationCompare two years and find it in DART
Compare Robin Bakery's two years on the staircase, then find the consolidated income statement in a real business report and read it in the same order.
STEP 1A table of one year of business
If the balance sheet is a photo of a single day at year-end, the income statement is a one-year video. First, let's pin down the word 'period'.
Picture the household ledger of a neighborhood bakery owner. Add up all the money that came in from selling bread over the year, then subtract flour costs, employee wages, store rent, loan interest, and taxes in turn, and you get 'how much is left this year'. The is this calculation organized at company scale. In Korean, the word for it combines 'loss' and 'profit', and in the end it is a table that subtracts expenses from revenue to get profit.
The most important difference is time. The balance sheet in Lesson 6 shows numbers at one point in time: "what do we own as of December 31?" The income statement collects numbers over a period: "what came in and went out from January 1 to December 31?" That's why the revenue and profit on an income statement start over from zero in the new year, while the cash or borrowings on a balance sheet carry over the prior year-end balance. The header of a real business report's income statement also states the period, such as "2024.01.01 to 2024.12.31".
| Item | Balance sheet | Income statement |
|---|---|---|
| Analogy | A photo of a single day at year-end | A one-year video |
| Heading example | As of 2024.12.31 | From 2024.01.01 to 2024.12.31 |
| At the new year | Balance carried over | Rebuilds from zero |
| Key numbers | Assets · liabilities · equity | Revenue · expenses · profit |
Revenue, expenses, and profit
There are only three kinds of numbers in the table: the revenue coming into the company (the largest being ), the expenses going out, and the profit, which is the difference between the two. If expenses exceed revenue, a loss is written in the profit slot. Robin Bakery sold KRW 12 billion worth of bread, cakes, and coffee over the year, and after subtracting all expenses, KRW 1.2 billion remained. 'We earned KRW 12 billion' and 'we earned KRW 1.2 billion' are both true because the first is sales and the second is profit.
Quick checkRobin Bakery's sales in January 2026 were KRW 1 billion. Should we add that to 2025's KRW 12 billion and write 'cumulative KRW 13 billion'?
STEP 2The five-step staircase of profit
Starting from revenue, subtract one kind of expense at a time as you step down. Each step produces a named profit.
The income statement doesn't subtract all expenses at once; it divides them by nature and subtracts them one after another. That's why profits with different names appear along the way. In the staircase chart below, tap the bars one by one.
Fictional company Robin Bakery's numbers (KRW 100 million). Year 3 uses the course-wide numbers; year 2 is a fictional set matched to the KRW 11 billion in sales from Lesson 7.
The expense subtracted at each step
The first line, . It is sales minus . Cost of goods sold is the money that went directly into making the products that were sold; for Robin Bakery it is KRW 7.2 billion: KRW 4.3 billion in raw materials, KRW 1.7 billion in manufacturing labor, KRW 800 million in depreciation of equipment such as ovens, and KRW 400 million in other manufacturing costs. KRW 12 billion − KRW 7.2 billion = KRW 4.8 billion remains. This line shows how profitable the product itself is, and we will look at it in detail in the next lesson.
The second line, . Subtract (SG&A) from gross profit. SG&A is the money spent not on making but on selling and running the business: KRW 1.3 billion in store staff wages, KRW 800 million in rent, KRW 400 million in advertising, KRW 200 million in depreciation of store equipment, and KRW 600 million in other, KRW 3.3 billion in all. KRW 4.8 billion − KRW 3.3 billion = KRW 1.5 billion is the money earned from the core business. We zoom in on this line again in Lesson 14.
The third line, . Add and subtract revenue and expenses arising outside the core business (non-operating income and expenses). For Robin Bakery, the only item is KRW 100 million of interest expense on the KRW 2.1 billion of borrowings seen in Lesson 10, so KRW 1.5 billion − KRW 100 million = KRW 1.4 billion. Real companies also have items here such as finance income and costs, foreign exchange gains and losses, and equity-method gains and losses from associates.
The fourth line, . Subtracting KRW 200 million of corporate income tax leaves KRW 1.2 billion. This is the profit that finally remains for shareholders, and the EPS (earnings per share) of KRW 600 in Economics Lesson 1 is also this KRW 1.2 billion divided by 2 million shares.
Why the names differ a little
The shape of the table can differ slightly from company to company. Korean-adopted IFRS (K-IFRS) No. 1001 allows expenses to be classified either by function (cost of goods sold, SG&A: where the money was spent) or by nature (raw materials, labor, depreciation: what the money was spent on). Most manufacturing and distribution companies present by function, so the gross profit line is visible, but companies presenting by nature may have no gross profit line. Also, under the same standard, the income statement and the may be combined into one statement or presented as two. The statement of comprehensive income is the table that adds 'other comprehensive income', such as valuation gains and losses on shares held, to net income; at first, reading up to net income is enough.
Common misconceptions
- "If revenue grows, profit naturally grows too?"
- No. If raw material prices or labor costs rise faster than revenue, profit falls even when revenue is a record. Finding which step of the staircase profit shrank at is the heart of reading an income statement.
- "Net income can't be bigger than operating profit?"
- It can. If non-operating items are strongly positive, or income tax is booked as a refund (income), net income exceeds operating profit. You can check a real example in the DART screen in STEP 3, and the reason is covered in Lesson 15.
- "If profit is KRW 1.2 billion, did the bank account grow by KRW 1.2 billion too?"
- No. Many items, such as credit sales and depreciation, make profit and cash move differently. Robin Bakery's actual cash increase was KRW 400 million (Lesson 1). We unpack this difference in the cash flow statement in Part 4.
Quick checkIf Robin Bakery raises advertising from KRW 400 million to KRW 700 million and everything else stays the same, what happens to gross profit and operating profit?
STEP 3Compare two years and find it in DART
Looking at only one year of an income statement gives half the picture. Put it next to last year, connect it to the balance sheet, and find it in a real report.
Compare with last year step by step
In the staircase chart above, tap year 2 and year 3 alternately. Step by step, it looks like this.
| Step (KRW 100 million, fictional) | Year 2 | Year 3 | Growth |
|---|---|---|---|
| sales | 110 | 120 | +9.1% |
| Gross profit (margin) | 44 (40%) | 48 (40%) | +9.1% |
| Operating profit (margin) | 12 (10.9%) | 15 (12.5%) | +25.0% |
| Net income | 9 | 12 | +33.3% |
Sales grew 9%, but operating profit grew 25% and net income 33%. Gross margin was the same 40%, so product margin was unchanged, and because SG&A rose only slightly from 32 to 33, growth rates got larger further down the steps. This happens when many costs go out regardless of sales, like rent, and we meet it again under the name 'operating leverage' in Lesson 14. The flip side is that if sales fall, profit falls even more.
Net income flows into the balance sheet
Let's re-check the link from Lesson 1 with numbers. Net income of KRW 1.2 billion, the final scene of the one-year video, builds up in the year-end photo's retained earnings after KRW 300 million of dividends to shareholders (Lesson 9). Whether the two statements tie out is also a basic check that the accounting was done properly.
Income statement
Jan 1 – Dec 31 (video)
Balance sheet · Equity
As of Dec 31 (photo)
Fictional company Robin Bakery (KRW 100 million). Opening retained earnings 26 + net income 12 − dividends 3 = closing 35. Equity 60 = share capital 10 + capital surplus 15 + retained earnings 35.
Find it yourself on DART
A real company's income statement is under III. Financial Matters → 2. Consolidated Financial Statements in the business report. The screen below is the very same report where we opened the balance sheet in Lesson 6, with the line directly below the balance sheet in the table of contents clicked. This company filed the income statement (2-2) and the statement of comprehensive income (2-3) as two separate statements. It isn't meant as a company recommendation; it's an example for learning the path.
12345- 1In the document contents on the left, click 2-2. Consolidated income statement. The table header states the period, such as '2024.01.01 to 2024.12.31'.
- 2Check the unit. It is in KRW million, so 300,870,903 is about KRW 300.9 trillion. The columns from the left are this year (Term 56), last year, and the year before.
- 3Start at the top of the staircase, with sales, and step down through cost of sales to gross profit.
- 4Check the operating profit left after subtracting selling and administrative expenses. This line is the core business's result.
- 5Pass through other income and expenses, finance income and costs, and income tax to arrive at net income. The 'owners of the parent' share below it is the shareholders' share seen in Lesson 11.
Screen: DART, Samsung Electronics business report filed 2025.03.11 (Term 56, 2024.01.01–2024.12.31), consolidated income statement. A wayfinding example, not investment advice.
Stepping down the staircase with the numbers on the screen, 2024 (Term 56) is sales of about KRW 300.9 trillion → gross profit about KRW 114.3 trillion → operating profit about KRW 32.7 trillion → income before income tax about KRW 37.5 trillion → net income about KRW 34.5 trillion. In this year, net income was larger than operating profit, because non-operating items such as finance income were positive. One column to the right, 2023 (Term 55) has operating profit of about KRW 6.6 trillion and net income of about KRW 15.5 trillion, an even bigger gap, because the income tax expense line is a negative shown in parentheses, i.e. it was booked as income from getting tax back. How to find where operating profit and net income split apart like this is covered in Lesson 15.
How to use it in investing
| When you see this news | Line to check first | What to check |
|---|---|---|
| "Record revenue" | Sales → operating profit | Whether margins rose too, and whether costs grew faster |
| "Raw material prices surge" | Gross profit | How many percentage points gross margin fell (Lesson 13) |
| "Operating profit turns positive" | Operating profit | Whether SG&A was cut or sales grew (Lesson 14) |
| "Net income surges" | The lines above income before income tax | Whether it's a one-off non-operating gain (Lesson 15) |
In stock price = earnings × multiple (Learn (Economics) Lesson 1), the 'earnings' the market looks at for longest are generally the core-business profit that can recur. So it's important to build the habit of looking together at operating profit and the lines above it, not only at net income.
Not always. Line item names and order differ a little by company, and financial companies look very different, for instance starting with interest income and interest expense instead of cost of sales. For a table you're seeing for the first time, first check the period and unit, find the top (sales) and the bottom (net income), and then fill in the middle steps.
Quick checkA company's income statement shows sales +5%, gross profit +5%, and operating profit −20%. Which step is the likeliest culprit for the lower profit?
✓What we learned today
- The income statement is a record of business over a period such as one year. Unlike the balance sheet, a photo of a single day at year-end, its numbers rebuild from zero each year.
- Profit is a five-step staircase. Sales 120 → gross profit 48 → operating profit 15 → income before income tax 14 → net income 12 (Robin Bakery, KRW 100 million).
- A different expense is subtracted at each step. In order: cost of sales (money spent to make the product), selling and administrative expenses (money spent to sell and run the business), non-operating items (interest and so on), and income tax.
- Net income builds up in the balance sheet's retained earnings after dividends (26 + 12 − 3 = 35). This is how the two statements connect.
- For a real company, you can read the same staircase from top to bottom in the business report under III. Financial Matters → 2. Consolidated Financial Statements → Consolidated income statement. Check the unit first.
In the next lesson, we zoom in on the first step of the staircase, sales and cost of sales. Break down the price of a single loaf of bread and move the controls yourself to see how gross margin wobbles when raw material prices rise.
Quiz5-question quiz
Pick an answer and it's graded right away with an explanation.
Q1. What is the biggest difference between the income statement and the balance sheet?
The income statement is a video of 'January 1 to December 31', and the balance sheet is a photo 'as of December 31'. That's why sales and profit rebuild from zero every year.
Q2. Robin Bakery's sales are KRW 12 billion and its cost of sales is KRW 7.2 billion. What is gross profit?
Gross profit = sales − cost of sales = 120 − 72 = KRW 4.8 billion. Subtract another KRW 3.3 billion of SG&A from this to get operating profit of KRW 1.5 billion.
Q3. In which expense on the income statement does store rent go? (Based on Robin Bakery)
Rent is not money spent directly to make the product but to sell and run the business, so it goes in SG&A. It doesn't affect gross profit and reduces operating profit.
Q4. In one year, net income came out larger than operating profit. Which is the most likely reason?
Below operating profit, non-operating items and income tax are added or subtracted. If finance income is large or income tax is booked as income, net income can exceed operating profit. Cost of sales and SG&A sit above operating profit.
Q5. Robin Bakery's opening retained earnings are KRW 2.6 billion, net income KRW 1.2 billion, and dividends KRW 300 million. What are the closing retained earnings?
26 + 12 − 3 = KRW 3.5 billion. The income statement's net income builds up in the balance sheet's retained earnings after dividends.
NextTerms · Next lesson · Related tools
A table showing revenue and expenses over a period and the resulting profit. Under K-IFRS, it also includes other comprehensive income and is called the statement of comprehensive income.
RevenueRevenueThe total amount a company earns by selling goods and services. It is the amount before deducting costs.
Cost of goods soldCost of goods soldThe costs directly incurred to make the products that were sold. They include raw material costs, manufacturing labor and equipment depreciation. The cost of unsold products stays in inventories and becomes cost of goods sold when sold.
Gross profitGross profitSales minus cost of sales. It's the first step of the income statement and shows how profitable the product itself is.
Selling and administrative expensesSG&ACosts not of making goods but of selling them and running the company. They include sales staff labor, rent, advertising, and depreciation on sales equipment. They are abbreviated as SG&A.
Operating profitOperating profitProfit from the core business: revenue minus cost of sales and selling, general and administrative expenses.
Income before income taxesIncome before income taxesOperating profit plus or minus non-operating items such as interest, exchange rates, and financial gains and losses. It is the profit just before tax is paid.
Net incomeNet incomeThe profit left after everything, including corporate income tax, is deducted. What remains after dividends builds up as retained earnings on the balance sheet, and dividing the parent's share by the number of shares gives EPS.
Statement of comprehensive incomeStatement of comprehensive incomeA statement that adds other comprehensive income, such as valuation gains and losses on financial assets held, to net income. Under K-IFRS it can be combined with the income statement into one statement or filed as two.
Retained earningsRetained earningsThe portion of the net income a company has earned that has been kept rather than paid out as dividends and the like. It is shown within equity on the balance sheet.
Put what you learned to use right away
Learn (Economics) Lesson 1 · Understand the economy and stock prices come into view→Earnings Calendar→This is educational material and not investment solicitation. There is no guarantee that past relationships will repeat in the future.