STEP 1A table of one year of business
If the balance sheet is a photo of a single day at year-end, the income statement is a one-year video. First, let's pin down the word 'period'.
Picture the household ledger of a neighborhood bakery owner. Add up all the money that came in from selling bread over the year, then subtract flour costs, employee wages, store rent, loan interest, and taxes in turn, and you get 'how much is left this year'. The is this calculation organized at company scale. In Korean, the word for it combines 'loss' and 'profit', and in the end it is a table that subtracts expenses from revenue to get profit.
The most important difference is time. The balance sheet in Lesson 6 shows numbers at one point in time: "what do we own as of December 31?" The income statement collects numbers over a period: "what came in and went out from January 1 to December 31?" That's why the revenue and profit on an income statement start over from zero in the new year, while the cash or borrowings on a balance sheet carry over the prior year-end balance. The header of a real business report's income statement also states the period, such as "2024.01.01 to 2024.12.31".
| Item | Balance sheet | Income statement |
|---|
| Analogy | A photo of a single day at year-end | A one-year video |
| Heading example | As of 2024.12.31 | From 2024.01.01 to 2024.12.31 |
| At the new year | Balance carried over | Rebuilds from zero |
| Key numbers | Assets · liabilities · equity | Revenue · expenses · profit |
Revenue, expenses, and profit
There are only three kinds of numbers in the table: the revenue coming into the company (the largest being ), the expenses going out, and the profit, which is the difference between the two. If expenses exceed revenue, a loss is written in the profit slot. Robin Bakery sold KRW 12 billion worth of bread, cakes, and coffee over the year, and after subtracting all expenses, KRW 1.2 billion remained. 'We earned KRW 12 billion' and 'we earned KRW 1.2 billion' are both true because the first is sales and the second is profit.
Revenue − expenses = profitRobin Bakery (fictional): sales KRW 12 billion − all expenses KRW 10.8 billion = net income KRW 1.2 billion
Quick checkRobin Bakery's sales in January 2026 were KRW 1 billion. Should we add that to 2025's KRW 12 billion and write 'cumulative KRW 13 billion'?
No. The 2026 income statement starts fresh from zero. The income statement is a record of a period, so it is calculated separately each year. Balance sheet balances such as cash or borrowings, on the other hand, carry over the end-of-2025 numbers.
STEP 2The five-step staircase of profit
Starting from revenue, subtract one kind of expense at a time as you step down. Each step produces a named profit.
The income statement doesn't subtract all expenses at once; it divides them by nature and subtracts them one after another. That's why profits with different names appear along the way. In the staircase chart below, tap the bars one by one.
Tap a bar. A blue bar is the profit remaining up to that step, and a red hatched bar is the expense subtracted at that step.
Fictional company Robin Bakery's numbers (KRW 100 million). Year 3 uses the course-wide numbers; year 2 is a fictional set matched to the KRW 11 billion in sales from Lesson 7.
The expense subtracted at each step
The first line, . It is sales minus . Cost of goods sold is the money that went directly into making the products that were sold; for Robin Bakery it is KRW 7.2 billion: KRW 4.3 billion in raw materials, KRW 1.7 billion in manufacturing labor, KRW 800 million in depreciation of equipment such as ovens, and KRW 400 million in other manufacturing costs. KRW 12 billion − KRW 7.2 billion = KRW 4.8 billion remains. This line shows how profitable the product itself is, and we will look at it in detail in the next lesson.
The second line, . Subtract (SG&A) from gross profit. SG&A is the money spent not on making but on selling and running the business: KRW 1.3 billion in store staff wages, KRW 800 million in rent, KRW 400 million in advertising, KRW 200 million in depreciation of store equipment, and KRW 600 million in other, KRW 3.3 billion in all. KRW 4.8 billion − KRW 3.3 billion = KRW 1.5 billion is the money earned from the core business. We zoom in on this line again in Lesson 14.
The third line, . Add and subtract revenue and expenses arising outside the core business (non-operating income and expenses). For Robin Bakery, the only item is KRW 100 million of interest expense on the KRW 2.1 billion of borrowings seen in Lesson 10, so KRW 1.5 billion − KRW 100 million = KRW 1.4 billion. Real companies also have items here such as finance income and costs, foreign exchange gains and losses, and equity-method gains and losses from associates.
The fourth line, . Subtracting KRW 200 million of corporate income tax leaves KRW 1.2 billion. This is the profit that finally remains for shareholders, and the EPS (earnings per share) of KRW 600 in Economics Lesson 1 is also this KRW 1.2 billion divided by 2 million shares.
Revenue − cost of sales = gross profit → − SG&A = operating profit → ± non-operating items = income before income tax → − income tax = net incomeRobin Bakery (fictional): 120 → 48 → 15 → 14 → 12 (KRW 100 million)
Why the names differ a little
The shape of the table can differ slightly from company to company. Korean-adopted IFRS (K-IFRS) No. 1001 allows expenses to be classified either by function (cost of goods sold, SG&A: where the money was spent) or by nature (raw materials, labor, depreciation: what the money was spent on). Most manufacturing and distribution companies present by function, so the gross profit line is visible, but companies presenting by nature may have no gross profit line. Also, under the same standard, the income statement and the may be combined into one statement or presented as two. The statement of comprehensive income is the table that adds 'other comprehensive income', such as valuation gains and losses on shares held, to net income; at first, reading up to net income is enough.
Common misconceptions
- "If revenue grows, profit naturally grows too?"
- No. If raw material prices or labor costs rise faster than revenue, profit falls even when revenue is a record. Finding which step of the staircase profit shrank at is the heart of reading an income statement.
- "Net income can't be bigger than operating profit?"
- It can. If non-operating items are strongly positive, or income tax is booked as a refund (income), net income exceeds operating profit. You can check a real example in the DART screen in STEP 3, and the reason is covered in Lesson 15.
- "If profit is KRW 1.2 billion, did the bank account grow by KRW 1.2 billion too?"
- No. Many items, such as credit sales and depreciation, make profit and cash move differently. Robin Bakery's actual cash increase was KRW 400 million (Lesson 1). We unpack this difference in the cash flow statement in Part 4.
Quick checkIf Robin Bakery raises advertising from KRW 400 million to KRW 700 million and everything else stays the same, what happens to gross profit and operating profit?
Gross profit stays at KRW 4.8 billion, and operating profit falls to KRW 1.2 billion. Advertising is part of SG&A, so it's subtracted at the second step. It isn't money spent on making the product (cost of sales), so the first step doesn't change.
STEP 3Compare two years and find it in DART
Looking at only one year of an income statement gives half the picture. Put it next to last year, connect it to the balance sheet, and find it in a real report.
Compare with last year step by step
In the staircase chart above, tap year 2 and year 3 alternately. Step by step, it looks like this.
| Step (KRW 100 million, fictional) | Year 2 | Year 3 | Growth |
|---|
| sales | 110 | 120 | +9.1% |
| Gross profit (margin) | 44 (40%) | 48 (40%) | +9.1% |
| Operating profit (margin) | 12 (10.9%) | 15 (12.5%) | +25.0% |
| Net income | 9 | 12 | +33.3% |
Sales grew 9%, but operating profit grew 25% and net income 33%. Gross margin was the same 40%, so product margin was unchanged, and because SG&A rose only slightly from 32 to 33, growth rates got larger further down the steps. This happens when many costs go out regardless of sales, like rent, and we meet it again under the name 'operating leverage' in Lesson 14. The flip side is that if sales fall, profit falls even more.
Net income flows into the balance sheet
Let's re-check the link from Lesson 1 with numbers. Net income of KRW 1.2 billion, the final scene of the one-year video, builds up in the year-end photo's retained earnings after KRW 300 million of dividends to shareholders (Lesson 9). Whether the two statements tie out is also a basic check that the accounting was done properly.
Income statement
Jan 1 – Dec 31 (video)
Sales120
Operating profit15
Income before income tax14
Net income12
→
Balance sheet · Equity
As of Dec 31 (photo)
Share capital10
Capital surplus15
Retained earnings35
Total equity60
Opening retained earningsNet incomeDividendsClosing retained earnings
Fictional company Robin Bakery (KRW 100 million). Opening retained earnings 26 + net income 12 − dividends 3 = closing 35. Equity 60 = share capital 10 + capital surplus 15 + retained earnings 35.
Find it yourself on DART
A real company's income statement is under III. Financial Matters → 2. Consolidated Financial Statements in the business report. The screen below is the very same report where we opened the balance sheet in Lesson 6, with the line directly below the balance sheet in the table of contents clicked. This company filed the income statement (2-2) and the statement of comprehensive income (2-3) as two separate statements. It isn't meant as a company recommendation; it's an example for learning the path.
![Screenshot of the consolidated income statement in a DART business report]()
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- 1In the document contents on the left, click 2-2. Consolidated income statement. The table header states the period, such as '2024.01.01 to 2024.12.31'.
- 2Check the unit. It is in KRW million, so 300,870,903 is about KRW 300.9 trillion. The columns from the left are this year (Term 56), last year, and the year before.
- 3Start at the top of the staircase, with sales, and step down through cost of sales to gross profit.
- 4Check the operating profit left after subtracting selling and administrative expenses. This line is the core business's result.
- 5Pass through other income and expenses, finance income and costs, and income tax to arrive at net income. The 'owners of the parent' share below it is the shareholders' share seen in Lesson 11.
Screen: DART, Samsung Electronics business report filed 2025.03.11 (Term 56, 2024.01.01–2024.12.31), consolidated income statement. A wayfinding example, not investment advice.
Stepping down the staircase with the numbers on the screen, 2024 (Term 56) is sales of about KRW 300.9 trillion → gross profit about KRW 114.3 trillion → operating profit about KRW 32.7 trillion → income before income tax about KRW 37.5 trillion → net income about KRW 34.5 trillion. In this year, net income was larger than operating profit, because non-operating items such as finance income were positive. One column to the right, 2023 (Term 55) has operating profit of about KRW 6.6 trillion and net income of about KRW 15.5 trillion, an even bigger gap, because the income tax expense line is a negative shown in parentheses, i.e. it was booked as income from getting tax back. How to find where operating profit and net income split apart like this is covered in Lesson 15.
How to use it in investing
| When you see this news | Line to check first | What to check |
|---|
| "Record revenue" | Sales → operating profit | Whether margins rose too, and whether costs grew faster |
| "Raw material prices surge" | Gross profit | How many percentage points gross margin fell (Lesson 13) |
| "Operating profit turns positive" | Operating profit | Whether SG&A was cut or sales grew (Lesson 14) |
| "Net income surges" | The lines above income before income tax | Whether it's a one-off non-operating gain (Lesson 15) |
In stock price = earnings × multiple (Learn (Economics) Lesson 1), the 'earnings' the market looks at for longest are generally the core-business profit that can recur. So it's important to build the habit of looking together at operating profit and the lines above it, not only at net income.
Not always. Line item names and order differ a little by company, and financial companies look very different, for instance starting with interest income and interest expense instead of cost of sales. For a table you're seeing for the first time, first check the period and unit, find the top (sales) and the bottom (net income), and then fill in the middle steps.
Quick checkA company's income statement shows sales +5%, gross profit +5%, and operating profit −20%. Which step is the likeliest culprit for the lower profit?
Selling and administrative expenses. Up to gross profit it grew at the same pace as sales, so the cost side was fine. But if operating profit fell, it means SG&A (advertising, labor, and so on), which is subtracted between the two, grew a lot.