Income Statement

Revenue (top line) minus Cost of Goods Sold equals Gross Profit. Subtract SG&A, R&D, and other operating expenses to get Operating Income (EBIT). Subtract interest expense and add interest income to get EBT (earnings before taxes). Apply the tax rate to get Net Income (bottom line). Divide Net Income by diluted shares outstanding to get EPS. Each step down the income statement introduces different cost categories, making it easy to isolate where a company's profitability breaks down.

Gross Margin = Gross Profit / Revenue — measures production efficiency. Operating Margin = EBIT / Revenue — measures core business profitability. Net Margin = Net Income / Revenue — measures overall profitability after all costs. In IB, you'll compare these margins across peer companies to identify relative outperformers. Margin expansion (improving margins over time) is a key investment thesis in PE, while margin compression raises red flags during due diligence.

Bankers adjust for one-time items (restructuring charges, litigation settlements, asset impairments) to derive normalized or adjusted earnings. A company might report GAAP net income of $50M but adjusted net income of $80M after adding back $30M of restructuring costs. Understanding which items are truly non-recurring vs. recurring 'non-recurring' charges is a critical skill. Interviewers may test this by asking you to evaluate a company's earnings quality.

In a three-statement model, you project the income statement first. Revenue is driven by volume x price or segment-level forecasts (revenue recognition rules determine timing). COGS is typically a percentage of revenue. D&A is linked to the PP&E schedule on the balance sheet. Interest expense is linked to the debt schedule. Tax rate is usually normalized to the statutory rate. The bottom line (net income) flows into retained earnings on the balance sheet and is the starting point for the cash flow statement.