An Income Statement shows your business's revenues and expenses over a given period of time, such as a month, quarter, or year. You use it to accurately calculate how much profit or loss your business has made in that period. It is also referred to as the Profit and Loss Statement, P&L, or the Statement of Revenue and Expense. You'll explore this statement in the next activity, with detailed definitions of the most important terms and relationships. At the top of the statement is the revenue section, covering different types of income. The next section looks at expenses widely known as direct costs, which in your statement may be called cost of goods sold, or other terms. These are costs that increase proportionally with increased sales, rather than general overheads. For example, in a manufacturing business, this would include the costs of inventory, production, and production labor. Gross profit is the difference between the revenue earned and the direct costs, or cost of goods sold. For example, if you sell $1,000 of goods and they cost you $250 to produce, then your gross profit is $750. Gross profit is a useful measure to compare the financial effectiveness of your key processes over time, and to help you see how appropriate your costs and pricing are. Comparing gross profit with other businesses can be difficult as different businesses may make different decisions about which costs are included in direct costs, especially in the service sector. More importantly, this only captures some of the costs in the business. Without including costs linked to the everyday running of the business, it can be misleading. Indirect costs are often recorded as selling, general and administrative expenses, or operating costs. These are costs that do not directly increase or decrease according to the amount of sales a business makes. These are the costs to keep the business running, for example, marketing, rent, wages, and utilities. When you deduct indirect costs from gross profit, you get a more comprehensive profit value called operating profit, or operating income, that tells you more about how much money your business is actually making. To continue the earlier example, where your gross profit is $750 – if all your indirect costs (marketing, wages, bills, rent) come to $500, your operating profit is $250. This value is the basis of a common calculation called EBITDA Earnings Before Interest, Taxation, Depreciation and Amortization. EBITDA can be used to compare businesses against each other, even if they are of different types or sizes. EBITDA is the most common measure used by external funding providers to calculate the profitability of the business. It also forms the basis of business valuations so it is an incredibly important metric to manage. The rest of the statement looks at the effects of tax, financing, and accounting decisions resulting in your net income.