A financial statement that shows revenue, expenses and profit during a given accounting period, usually either a quarter or a year. Along with the balance sheet, the income statement (also known as the profit and loss statement, or P&L) is Exhibit A in assessing the health and prospects of a company. Basically, what the income statement shows is revenue and expenses, including operating expenses, depreciation, income taxes and extraordinary items. Using the income statement, an investor can quickly figure cash flow, profit margins and other important indicators of how the business is doing.
That said, it's important to remember that accounting is as much an art as a science, and the income statement is often the result of some important judgment calls by both management and the company's auditors. These judgments can substantially affect a firm's showing in a given period. Thus, it's important to read the footnotes, since these often disclose the kinds of judgments that were made, as well as other material information.