How to Read an Income Statement: Revenue to Net Income, Line by Line

An income statement shows a company's revenue over a period, the costs and expenses taken out of it, and the profit or loss left, down to earnings per share.

It is one of the three main financial statements, beside the balance sheet and the cash flow statement, and it is the one most headlines are written from. This page covers where the statement sits in a filing, each line from the top down using the income statement in Microsoft's 10-K for the year to June 2026, how to turn the lines into margins and growth rates, the traps in the labels, and how Kresmion's Financials tab shows the same statement two ways. It is descriptive throughout.

Where the income statement sits

In an annual report on Form 10-K, the audited income statement is in Item 8 with the other financial statements and their footnotes; the 10-K guide maps the rest of the document. Quarterly versions, reviewed rather than audited, appear in each 10-Q. Companies use different names for it: statement of operations, statement of earnings, or, as Microsoft does, income statements.

Two features set it apart from the balance sheet. It covers a period, a quarter or a fiscal year, where the balance sheet is a snapshot on one date. And the SEC's Regulation S-X, Rule 5-03, lists the captions a commercial company's statement should show where they apply, from net sales and cost of goods sold through non-operating income, income tax and net income. That common set of captions is what lets two companies' statements be read side by side, even when their labels and subtotals differ.

The statement, line by line

Microsoft's fiscal year ends on 30 June. Its 10-K for the year ended 30 June 2026 was filed on 29 July 2026, and its income statement on page 50 reads as follows, in millions of dollars except per-share amounts:

Read from the top, each subtotal answers a different question.

• Revenue is what the company earned in the period by delivering goods and services, recognised under its revenue recognition policy; it can differ from what was billed or collected in the same period. Microsoft splits it into product and service revenue; service and other was 80.5% of the total in fiscal 2026.
• Cost of revenue is the direct cost of what was sold. Revenue less cost of revenue is gross profit, which Microsoft labels gross margin: $225,465 million.
• Operating expenses are the costs of running the business that are not tied to a specific sale: research and development, sales and marketing, general and administrative. Gross profit less these is operating income, $155,237 million, the profit from the business itself.
• Other income (expense) collects everything outside operations: interest earned and paid, gains and losses on investments and derivatives, currency effects. Operating income plus this line gives income before income taxes.
• The tax provision comes off next. Microsoft's 10-K puts its effective tax rate at 19% for fiscal 2026 and 18% for fiscal 2025.
• Net income, $133,749 million, is what is left for shareholders. Divided by the share count it becomes **earnings per share**, basic and diluted, printed below net income.

Every subtotal can be checked by hand: 331,839 less 106,374 is 225,465; less 35,562, 26,710 and 7,956 is 155,237; plus 10,697 is 165,934; less 32,185 is 133,749.

Turning the lines into margins and growth

Two kinds of comparison do most of the work.

Down the column, as margins. Divide each subtotal by revenue. For fiscal 2026 that gives a gross margin of 67.9%, an operating margin of 46.8% and a net margin of 40.3%, against 68.8%, 45.6% and 36.1% a year earlier. Gross margin slipped by nearly a point while operating margin widened, so costs below gross profit grew more slowly than revenue.

Across the row, as growth. Revenue rose 17.8% from fiscal 2025, operating income 20.8% and net income 31.3%. The gap between the last two is the line to look into, and here it is other income, which swung from a $4,901 million expense to $10,697 million of income. Note 3 of the 10-K breaks that line down, and says it includes $6.5 billion of net gains in fiscal 2026 from Microsoft's investments in OpenAI, against $4.8 billion of net losses the year before. A higher effective tax rate offset part of that swing. Operating income is the cleaner read on the business itself; net income includes the investment swing.

That is the general habit: when net income moves faster or slower than operating income, the explanation sits in the lines between them, and the footnotes say what those lines contain.

Traps in the labels

• The same word, different meanings. Microsoft's "gross margin" is a dollar amount. Most analysts use gross margin for the percentage, gross profit divided by revenue. Read the units before the label.
• Operating expenses is not a fixed set. Some companies include research and development in it and some show it apart. Some put depreciation in cost of revenue and some in a separate line.
• Fiscal years are named by the company. Microsoft's fiscal 2026 ended in June 2026, so its fiscal 2026 figures are not the same twelve months as a calendar-year company's 2026.
• Earlier years can change. Each 10-K prints prior years again, and a later filing can restate or reclassify them. The most recent filing's comparative column is the current version of an earlier year.
• Comprehensive income is reported apart from net income. Items such as currency translation and unrealised changes on some investments bypass net income and appear in a statement of comprehensive income, either a separate statement, as at Microsoft, or a second section of one continuous statement.

Standard and As reported in Kresmion's Financials tab

On a company's page in Kresmion's app, open with a free account, the Financials tab shows the income statement, balance sheet and cash flow by fiscal year or by quarter, built from the XBRL data in the company's SEC filings. A toggle switches between two views of the same filings.

Standard maps every company onto one set of lines so companies can be compared: revenue, cost of revenue, gross profit, research and development, operating expenses, operating income, income tax, net income, basic and diluted EPS and the weighted diluted share count, with gross, operating and net margin calculated as percentage rows. For Microsoft in fiscal 2026 the Standard view's operating expenses line reads $70,228 million, the sum of the three expense lines above, research and development included.

As reported keeps the filer's own lines, labels and order, as filed with the SEC. For Microsoft that means sales and marketing and general and administrative as separate lines, other income (expense) and income before income taxes, and the label gross margin on the dollar line. It is built from the SEC's Financial Statement Data Sets and from the XBRL of newly filed reports, which is a different route from the Standard view, so the most recent filing can reach one view before the other.

Each column links to its source filing on EDGAR. In the quarterly view, a fourth-quarter amount the company never reported on its own is calculated as the full year less the first nine months and marked as derived, while per-share figures for that quarter stay blank because they cannot be subtracted. The statement can be opened in Kresmion's spreadsheet, and there the KRM.FIN function, described in the guide, returns any Standard line in a cell. Kresmion does not adjust the reported amounts.

What the income statement cannot tell you

• Profit is not cash. Revenue is recorded when earned and costs when incurred, not when money moves. The cash flow statement shows the cash.
• It says nothing about what the company owns or owes. Debt, cash and other assets are on the balance sheet.
• Estimates sit inside the numbers. Revenue recognition, impairments and tax provisions all rest on management judgement, which the critical accounting estimates section of the 10-K describes.
• A standardised view loses detail. Mapping every filer onto common lines makes companies comparable but can merge lines a company shows apart, which is why the As reported view exists.
• One year is a single observation. A margin or growth rate is easier to read across several years and against similar companies.

Key takeaways

Frequently asked questions

What is the difference between gross profit and operating income?

Gross profit is revenue less the direct cost of what was sold. Operating income also subtracts the costs of running the business, such as research and development, sales and marketing, and general and administrative expenses. For Microsoft in fiscal 2026 the first was $225,465 million and the second $155,237 million.

Why is it called the bottom line?

Net income is the last amount line on the statement, after every cost, other income item and tax. Earnings per share follows it, but it is net income divided by the share count rather than a further deduction.

What is the difference between an income statement and a balance sheet?

The income statement covers a period and shows what was earned and spent during it. The balance sheet shows what a company owns and owes on one date. Net income from the income statement flows into retained earnings on the balance sheet.

Is the income statement audited?

The annual statements in a 10-K are audited by an independent registered public accounting firm. The quarterly statements in a 10-Q are reviewed, not audited.

Does a growing net income mean the stock will rise?

No. The income statement records what happened in a past period. It does not forecast the share price, and net income can grow because of items outside the business, as Microsoft's investment gains in fiscal 2026 show.

This page is information, not investment advice.

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Source: Microsoft Corporation, Form 10-K for the fiscal year ended 30 June 2026, filed 29 July 2026: Item 8 income statements (page 50), Note 3 Other income (expense), net, and the Item 7 discussion of the effective tax rate, https://www.sec.gov/Archives/edgar/data/789019/000119312526323660/msft-20260630.htm ; Regulation S-X Rule 5-03, 17 CFR 210.5-03, https://www.ecfr.gov/current/title-17/section-210.5-03 ; margins and growth rates computed by Kresmion from the 10-K figures ; Kresmion Financials tab (Standard and As reported views) and the KRM.FIN spreadsheet function.

Kresmion Research.