The last section of the income statement is where net profit (aka. the bottom line) is reported. Net profit is figured by deducting all expenses from gross profit. Net profit is also the figure used for income tax liability. The income statement usually shows two separated entries, net profit before and after taxes. Net profit margin percentage is calculated by diving gross sales revenue by the net profit amount.

• Gross profit $300,000


• Less operating expenses $120,000


• Less fixed expenses $80,000


• Equals net profit (before taxes) $100,000


• Less income taxes $50,000


• Equals net profit (after taxes) $50,000

10% Net Profit Margin, Before Taxes = Sales/ Net Profit Margin, Before Taxes

5% Net Profit Margin, After Taxes = Sales/Net Profit Margin, After Taxes

When analyzing the income statement there are generally two major segments to consider, revenue and expenses. Understanding the relationship between revenue and expenses is imperative for maximizing profitability. Once the business owner understands the various profit categories, they can then begin to effectively analyze the income statement.