The income statement shows how a company transforms revenue into profit over a defined period of time. It records what the business earned, what it spent, and what ultimately remained for shareholders after all operating, financing, and tax obligations were met. Read correctly, it provides a structured view of a firm’s economic activity and earning power.
This page explains each major line of the income statement in a logical sequence, focusing on economic meaning rather than accounting formalism. The objective is not to catalog every possible reporting variation, but to clarify how profits are generated, consumed, and retained as value for shareholders.
As a concrete illustration, this page uses Berkshire Hathaway’s 2024 income statement. Berkshire is particularly well suited for this purpose because it is a large, diversified conglomerate with operating businesses spanning insurance, manufacturing, railroads, energy, and services. Its financial statements aggregate very different economic activities, making them a useful reference for understanding how the same income statement structure applies across multiple industries.
The explanations that follow use Berkshire’s reported figures as context, but the principles apply broadly. Whether analyzing a simple manufacturer, a technology company, or a diversified group, the same income statement framework governs how revenue flows through costs and expenses to produce profit.
| Total | Detail | Category | Amount (MUSD) |
|---|---|---|---|
| Revenue | Insurance premiums earned | Revenue – Insurance & Other | 88,257 |
| Sales and service revenues | Revenue – Insurance & Other | 202,334 | |
| Leasing revenues | Revenue – Insurance & Other | 9,227 | |
| Interest, dividend and other investment income | Revenue – Insurance & Other | 21,825 | |
| Total Insurance & Other revenues | Revenue subtotal | 321,643 | |
| Railroad transportation revenues | Revenue – RUE | 23,355 | |
| Utility and energy operating revenues | Revenue – RUE | 21,518 | |
| Service revenues and other income | Revenue – RUE | 4,917 | |
| Total RUE revenues | Revenue subtotal | 49,790 | |
| Total Revenues | Total Revenue | 371,433 | |
| Investment gains (losses) | Gains (non-operating) | 52,799 | |
| Expenses | Insurance losses and LAE | Expense – Insurance & Other | 56,186 |
| Life, annuity and health benefits | Expense – Insurance & Other | 3,858 | |
| Insurance underwriting expenses | Operating expense – Insurance & Other | 16,808 | |
| Cost of sales and services | COGS / service cost | 163,642 | |
| Cost of leasing | Leasing COGS | 7,069 | |
| Selling, general & administrative | SG&A | 25,642 | |
| Interest expense (Insurance & Other) | Interest expense | 1,594 | |
| Total Insurance & Other expenses | Expense subtotal | 274,799 | |
| Freight rail transportation expenses | Operating expense – Railroad | 15,965 | |
| Utilities and energy cost of sales & other expenses | Operating expense – Utilities & Energy | 16,984 | |
| Other expenses (RUE) | Other operating expense | 4,343 | |
| Interest expense (RUE) | Interest expense | 3,606 | |
| Total RUE expenses | Expense subtotal | 40,898 | |
| Total Costs and Expenses | Total expenses | 315,697 | |
| Pre-tax Income | Earnings before taxes and equity method | Pre-tax income | 108,535 |
| Equity method earnings | Equity income | 1,841 | |
| Earnings before income taxes | Pre-tax income | 110,376 | |
| Taxes | Income tax expense | Income taxes | 20,815 |
| Net Income | Net earnings (incl. noncontrolling interests) | Net income | 89,561 |
| Net income attributable to noncontrolling interests | NCI portion | 566 | |
| Net income attributable to Berkshire shareholders | Net income to shareholders | 88,995 | |
| EPS | Net income per Class A share | EPS – Class A (USD per share) | 61,900* |
| Net income per Class B share | EPS – Class B (USD per share) | 41.27* | |
| Shares | Average equivalent Class A shares | Share count | 1,437,720* |
| Average equivalent Class B shares | Share count | 2,156,580,296* |
* Dollar amounts in the second column are in millions of USD except per-share figures and share counts, which are shown as reported in the Form 10-K.
The top line of the income statement is revenue, the total amount of money a company brings in during the reporting period, whether quarterly or annually. Revenue reflects all the goods and services sold before any expenses are deducted. For a straightforward business, this might be the value of products shipped to customers.
For a diversified conglomerate like Berkshire Hathaway, revenue comes from several very different activities: insurance premiums collected from policyholders, sales and services generated by subsidiaries such as GEICO or Precision Castparts, transportation revenue from BNSF Railway, and energy-related revenue from Berkshire Hathaway Energy.
When Berkshire reports 371 billion USD in total revenue for the year, that figure represents the combined inflow from all these operations before considering costs such as claims, manufacturing expenses, payroll, or taxes.
Revenue is the doorway through which all financial performance begins, and every subsequent line on the income statement measures what remains of that inflow as costs are progressively deducted.
Cost of Revenue represents the total direct costs a company incurs to generate the sales it reports. These are the expenditures that arise specifically because the firm is delivering its products or services during the period. For a manufacturer, this includes materials, production labor, and factory-related expenses.
For service firms or diversified groups, the definition is broader: it can include claim costs in insurance operations, service-delivery expenses, distribution costs, and other items directly tied to revenue creation.
In some industries, particularly insurance, the distinction between cost of revenue and operating expenses can be less rigid, as claim costs and underwriting expenses are integral to revenue generation.
In Berkshire Hathaway’s case, cost of revenue encompasses manufacturing and service costs at subsidiaries such as Precision Castparts, insurance claim and underwriting costs at GEICO and the reinsurance operations, and operating expenditures for businesses like BNSF Railway and Berkshire Hathaway Energy.
When Berkshire reports over 160 billion USD in cost of sales and services for the year, that figure represents the portion of revenue consumed by the activities required to produce and deliver what the company sells. Cost of Revenue is the first major deduction from total revenue and defines the step toward determining gross profit.
Gross margin measures how much of a company’s revenue remains after covering the direct costs of generating that revenue. It is calculated as revenue minus cost of revenue, and it reflects the economic strength of the underlying business model: companies with more pricing power, operational efficiency, or differentiated products tend to maintain higher gross margins.
For a simple manufacturer, gross margin shows how effectively the firm turns raw materials and labor into profitable output. For a diversified enterprise like Berkshire Hathaway, the concept applies across several types of operations.
Insurance subsidiaries generate margin through underwriting discipline; manufacturing units earn margin by controlling production costs; and businesses such as BNSF Railway or Berkshire Hathaway Energy contribute margin through efficient transportation and utility operations.
When Berkshire’s total revenue exceeds its direct operating costs by a substantial amount, the difference forms its gross margin — the portion of each dollar of revenue available to pay for administrative expenses, business development, financing costs, and ultimately to contribute to shareholder profit.
Certain industries naturally operate with high gross margins because their products are differentiated, require relatively little incremental cost to deliver, or benefit from strong pricing power.
Software is the most common example: companies like Microsoft, Adobe, and Salesforce routinely report gross margins above 70% because once the software is developed, selling an additional license costs very little.
Luxury brands such as Hermès or LVMH also demonstrate high margins, often above 60%, reflecting brand strength and the ability to command premium pricing. Payment networks like Visa and Mastercard operate on scalable digital infrastructure, giving them gross margins in the 70–80% range.
Even within technology hardware, firms such as Apple maintain gross margins around 40% thanks to strong ecosystem control and premium positioning.
Studying these companies helps investors see what a “good business” often looks like: consistent pricing power, low incremental cost, and products or services that customers are willing to pay a premium for. These characteristics tend to produce stable and attractive gross margins across economic cycles.
Operating expenses represent the ongoing costs required to run the business beyond the direct cost of producing goods or services. These include items such as salaries for administrative staff, marketing, technology investments, rent, logistics, and general corporate overhead.
They do not fluctuate purely with sales volume in the same way cost of revenue does, which makes them important for understanding the efficiency of a company’s internal structure. A firm with well-controlled operating expenses can turn a moderate gross margin into strong operating income, while one with heavy administrative overhead may struggle even with healthy revenue.
In Berkshire Hathaway’s case, operating expenses appear in several forms: underwriting expenses within the insurance units, administrative and selling expenses in the manufacturing and retail subsidiaries, and maintenance or support functions across the conglomerate. These expenditures reflect the cost of keeping the organization functioning day to day.
Evaluating operating expenses helps readers judge how disciplined and scalable a business is, and how much of its gross profit is preserved as it moves toward operating income.
Some income statement items are non-operating, meaning they do not arise from the company’s primary business activities. These can include investment gains or losses, asset sales, or one-time events, and they may introduce volatility that does not reflect the underlying operating performance of the business.
Depreciation represents the gradual allocation of the cost of long-lived assets—such as buildings, machinery, equipment, or vehicles—over the period in which they are used. Instead of expensing the full cost in the year the asset is purchased, accounting rules require companies to spread that cost across the asset’s useful life.
This produces a non-cash expense on the income statement that reduces reported profit even though no cash is leaving the company at that moment. Depreciation is essential for capital-intensive businesses such as railroads, utilities, telecommunications, and manufacturing.
For example, Berkshire Hathaway’s subsidiaries like BNSF Railway and Berkshire Hathaway Energy record significant annual depreciation due to their large networks of track, power plants, and equipment. This helps match the cost of those assets with the revenues they help generate.
Because depreciation depends on managerial assumptions, e.g. useful life, residual value, and depreciation methods, it creates opportunities for financial statements to appear stronger or weaker depending on how these estimates are chosen.
A company can increase reported profit by extending the useful life of its assets, which spreads depreciation over more years. Conversely, shortening useful lives or taking large write-downs can suppress earnings to create a cleaner base for future growth.
In some cases, aggressive assumptions may hide underlying deterioration of assets or create the illusion of higher profitability. Capital-intensive sectors are especially sensitive to these risks, since even small changes in assumptions can move billions of dollars of expenses.
For readers of financial statements, understanding depreciation policies and comparing them to peers is an important step in evaluating the reliability of reported earnings and the quality of management’s judgment.
Amortization of intangible assets represents the gradual allocation of the cost of non-physical assets—such as customer relationships, brands, patents, software, or licenses—over their estimated useful lives. Like depreciation, amortization is a non-cash expense that reduces reported earnings without an immediate cash outflow.
In practice, amortization often arises from acquisitions rather than from ongoing operations. When a company acquires another business, accounting rules require part of the purchase price to be allocated to identifiable intangible assets, which are then amortized over time.
As a result, two companies with similar operating economics may report very different amortization expenses depending on their acquisition history.
This makes amortization an important line to understand rather than automatically dismiss. While it does not represent a current-period cash cost, it reflects past capital allocation decisions and can materially affect reported operating income.
Comparing amortization policies and acquisition intensity across peers helps investors assess how much of reported profit is driven by underlying operations versus accounting allocations from past deals.
Research and Development expenses represent the money a company invests to create new products, improve existing ones, or develop future technologies. These costs do not generate immediate revenue but are essential for firms whose competitiveness depends on continuous innovation.
In software, R&D includes engineering teams building new features, maintaining core platforms, and developing cloud or AI capabilities. Companies such as Microsoft, Alphabet, NVIDIA, and Salesforce devote a significant portion of their operating budget to R&D because product improvement is central to long-term growth.
In the pharmaceutical and biotech industries, R&D spending covers laboratory research, clinical trials, regulatory work, and drug-development pipelines. Firms like Pfizer, Merck, Roche, and Amgen often spend more than 15–20% of revenue on R&D, reflecting the cost and complexity of bringing a new therapy to market.
Understanding R&D helps investors assess how much a company is investing in its future and whether it operates in an innovation-driven sector where sustained R&D spending is a structural requirement rather than an optional expense.
Operating income (EBIT) represents the profit generated by a company’s core business operations after deducting cost of revenue and operating expenses, but before interest and income taxes.
It is a key measure of operating efficiency and allows investors to compare companies with different capital structures on a more consistent basis.
Note on EBITDA
This page intentionally does not use EBITDA. Metrics that exclude depreciation may be convenient, but for capital-intensive businesses they often obscure the true cost of staying in business. As a result, EBITDA is of limited usefulness when assessing economic profitability.
Even at the level of operating income (EBIT), reported earnings may include items that are not expected to repeat regularly. These can include restructuring charges, litigation outcomes, asset impairments, insurance losses from exceptional events, or gains from asset disposals embedded within operating results.
Distinguishing between recurring and non-recurring components is essential for understanding a company’s sustainable earning power. A single year’s EBIT may overstate or understate the economics of the business if it is influenced by unusual events that do not reflect normal operations.
For valuation and long-term analysis, the focus is not on any one reporting period but on the level of operating profit the business can reasonably generate over time. Identifying non-recurring items is important in isolating the durable economic performance of the enterprise.
Interest expense represents the cost a company pays for using borrowed money. It arises from bank loans, corporate bonds, credit facilities, or any other form of debt financing. This expense appears below operating income because it is tied to the firm’s capital structure rather than to its core business activities.
A company with a strong balance sheet and stable cash generation can typically borrow at lower rates, keeping interest expense manageable. In contrast, firms with highly leveraged balance sheets, volatile earnings, or weaker credit ratings often face higher financing costs, which can absorb a significant portion of their profits.
Berkshire Hathaway offers a useful contrast: although its operating subsidiaries such as BNSF Railway and Berkshire Hathaway Energy issue substantial long-term debt to fund infrastructure, the holding company maintains a large cash position and very high credit quality, which keeps its consolidated interest burden relatively modest compared with its scale.
Understanding interest expense helps readers see how much of a company’s earnings must be diverted to creditors before shareholders receive any benefit, and how sensitive the firm might be to rising interest rates or tightening credit conditions.
Pre-tax income represents the profit a company earns before accounting for income taxes. It is calculated after deducting operating expenses, interest expense, and any non-operating gains or losses, making it a comprehensive measure of the firm’s economic performance for the period.
Because taxes can vary widely across jurisdictions and can be influenced by one-time adjustments, deferred tax items, or changes in tax law, pre-tax income is often a cleaner indicator of underlying profitability than net income.
It shows how efficiently the business generates profit from its operations and capital structure before the government’s share is applied.
Berkshire Hathaway illustrates this well: despite significant volatility from investment gains and losses flowing through GAAP earnings, the company’s consolidated pre-tax income provides a steady view of performance across its insurance, manufacturing, energy, and railroad segments.
Understanding pre-tax income allows readers to compare companies more directly, evaluate the effect of leverage, and assess how much earnings capacity is available before tax policy and accounting treatments influence the final result.
Income taxes represent the portion of a company’s pre-tax income that must be paid to federal, state, and sometimes foreign tax authorities. This line reflects the application of tax laws to the company’s earnings and includes both current taxes owed for the period and deferred tax adjustments arising from timing differences between accounting rules and tax rules.
Because tax rates differ across countries and industries, the income tax line can vary significantly even among companies with similar pre-tax profit. It can also be influenced by one-time items such as asset sales, revaluations, changes in deferred tax balances, or shifts in tax legislation.
Berkshire Hathaway provides a clear example of this dynamic: the company operates across multiple jurisdictions and holds large investment portfolios, so its tax expense fluctuates with investment gains, insurance underwriting cycles, and regulatory changes.
For readers of financial statements, examining the income tax line helps clarify how much of a company’s economic profit ultimately flows to shareholders and how sensitive the firm is to changes in tax policy or to the composition of its earnings.
Net income is the final measure of profitability on the income statement and represents the amount of profit remaining after all expenses have been deducted: cost of revenue, operating expenses, depreciation, interest, and income taxes.
It captures the total earnings available to shareholders and serves as the basis for metrics such as earnings per share (EPS) and return on equity (ROE). Because every line above it influences the result, net income reflects both operational performance and management decisions about financing, investment, and accounting policy.
In a firm like Berkshire Hathaway, net income includes not only the operating earnings of its insurance, manufacturing, railroad, and energy subsidiaries but also the gains and losses from changes in the value of its large investment portfolio. This can make year-to-year figures appear volatile, even when the operating businesses are steady.
Understanding net income helps readers distinguish between recurring business performance and items that may not reflect long-term economics. It is the final destination of the income statement and a key indicator of the value created for shareholders during the reporting period.
Earnings per Share shows how much of a company’s net income is attributable to each share of common stock. It is calculated by dividing net income available to shareholders by the weighted-average number of shares outstanding during the reporting period.
EPS allows investors to compare profitability across companies of different sizes and to track how much profit each individual share is generating over time. It also reflects the effects of share issuance and buybacks: if a company reduces its share count through repurchases, EPS can rise even if total net income stays the same.
Berkshire Hathaway illustrates the role of capital structure well. Although Berkshire does not pay a dividend, it frequently repurchases its own shares when management believes they trade below intrinsic value. This reduces the share count and increases the EPS figure for remaining shareholders. Because Berkshire has both Class A and Class B shares, the income statement reports EPS for each class based on their conversion ratio.
Understanding EPS helps readers evaluate profitability on a per-share basis and judge how effectively a company is using its capital to enhance shareholder value.