In an income statement, the "topline" refers to a company's total revenue, while the "bottomline" represents its net income. The conversion from topline to bottomline involves a series of deductions for various costs and expenses incurred during a specific accounting period.
Here's a walkthrough of how topline converts to bottomline in an income statement:
- Revenue (Topline): This is the starting point of the income statement and represents the total income generated from the sale of goods or services before any expenses are deducted. It's also known as sales or gross sales.
- Cost of Goods Sold (COGS): Directly below revenue, COGS includes the direct costs associated with producing the goods sold or services provided. This can include the cost of raw materials, direct labor, and manufacturing overhead.
- Calculation: Revenue - Cost of Goods Sold = Gross Profit.
- Gross Profit: This figure indicates the profit a company makes from its core business operations before considering operating expenses.
- Operating Expenses: These are the costs incurred in running the business, not directly tied to production. They typically include:
- Selling, General, and Administrative (SG&A) Expenses: Costs related to selling products (e.g., marketing, advertising) and general business operations (e.g., salaries, rent, utilities, office supplies).
- Research and Development (R&D) Expenses: Costs associated with developing new products or improving existing ones.
- Depreciation and Amortization: Non-cash expenses that account for the gradual loss of value of tangible assets (depreciation) and intangible assets (amortization) over time.
- Calculation: Gross Profit - Operating Expenses = Operating Income (or EBIT - Earnings Before Interest and Taxes).
- Operating Income (EBIT): This shows the profit generated from a company's regular business operations before accounting for non-operating items, interest, and taxes.
- Non-Operating Income and Expenses: This section includes revenues and costs not directly related to the company's primary business activities. Common examples include:
- Interest Expense: The cost of borrowing money.
- Interest Income: Income earned from investments.
- Gains or Losses: From the sale of assets or other non-recurring events.
- Calculation: Operating Income +/- Non-Operating Income/Expenses = Earnings Before Taxes (EBT).
- Earnings Before Taxes (EBT): This is the profit remaining before income taxes are deducted.
- Income Tax Expense: The amount of taxes a company owes on its taxable income.
- Calculation: Earnings Before Taxes - Income Tax Expense = Net Income (Bottomline).
- Net Income (Bottomline): This is the final figure on the income statement, representing the company's profit after all revenues, gains, expenses, losses, interest, and taxes have been accounted for. It is often referred to as the "bottom line" because it appears at the very end of the income statement.