A business is only worth the profit that it will generate for its owners from now until doomsday, discounted back to the present, adjusted for inflation. As the “report card” of those earnings, income statement will help determining the price you should be willing to pay for a business.

Income statement, also called profit and loss statement (P&L), is a company’s financial statement that indicates how the revenue (Often called the “top line” , which is money received from the sale of products and services before expenses are taken out) is transformed into the net income (the result after all revenues and expenses have been accounted for, also known as the “bottom line”).

Income statement represents a period of time, usually one quarter of a fiscal year and the entire fiscal year.

This contrasts the balance sheet, which represents a single moment in time. The purpose of the income statement is to show managers and investors whether the company made or lost money during the period being reported.

Income statement analysis reveals important insights into how effectively management is controlling expenses, the amount of interest income and expense, and the taxes paid. Stock investors can use income statement analysis to calculate financial ratios that will provide the rate of return the business is earning on the shareholders’ retained earnings and assets. Investors can also compare a company’s profits to its competitors by examining various profit margins such as the gross profit margin, operating profit margin, and net profit margin.