How to Read an Income Statement? Step by Step from Sales to Net Profit

The income statement (gelir tablosu) is the core financial statement that shows all the revenue a company earned in a given period, the costs and expenses it incurred in the same period, and the resulting net profit or loss for the period. The balance sheet takes a snapshot of the company on a particular day; the income statement plays the film of the year up to that day. When an investor asks “is this company making money, and if so, from where?”, this is the first statement they look at.

The statement is read from top to bottom. Sales are at the top, a group of costs or expenses is deducted at each step, and net profit is reached at the bottom. In this article, we use a fictional example to explain the structure used by companies in Turkey that keep books on the balance sheet basis, the six main line items, and what each intermediate profit subtotal tells an investor.

What is an income statement, and how does it differ from a balance sheet?

This statement measures the results of the company's operations in an accounting period. The balance sheet, on the other hand, shows assets, liabilities and equity at the end of the period as of a single date. The two statements are linked by the net profit for the period line: the last line of the income statement is carried into equity on the balance sheet.

This link also explains why reading the two statements separately is not enough. If a company whose sales are rising fast also has swollen receivables, the profit may stay on paper. We covered how the asset and liability side is read in our article what is a balance sheet ; here we focus only on the lines of the income statement.

In Turkey, the framework for statements prepared under tax legislation is set by the 26 December 1992 Official Gazette issue publishing General Communiqué No. 1 on the Application of the Accounting System. The Communiqué lists the balance sheet and the income statement, together with their notes and appendices, as the basic financial statements. It also requires the income statement to be prepared in a uniform format with prior-period and current-period columns so that it is comparable.

Income statement line items: 6 steps from sales to net profit

The detailed structure in the Communiqué corresponds exactly to class 6, the income statement accounts, of the Uniform Chart of Accounts. The table below shows the six main line items and the subtotal calculated after each item. The (-) sign in the rows means that the item is deducted from the amount above it.

In preparing the statement, the Communiqué requires income from main activities to be shown separately from other recurring ordinary income and from non-recurring extraordinary income. The same distinction applies to expenses. This distinction lets the reader separate earnings expected to recur from one-off gains.

1. Gross sales and net sales

Gross sales are shown in three sub-items: domestic sales, export sales and other income. This amount arises from sales of goods and services in the company's main line of business. A software company's license revenue is gross sales; the interest the same company earns on bank deposits is not sales and appears in the steps below.

Sales deductions cover sales returns, sales discounts and other deductions. Net sales are reached when these deductions are subtracted from gross sales. In analyses, margins are generally calculated on net sales, because returns and discounts show the revenue the company actually keeps.

2. Cost of sales

Cost of sales includes the cost of finished goods, merchandise and services sold during the period. In a manufacturing company, this amount consists of direct materials, direct labor and manufacturing overhead. The Communiqué provides for the details of this item to be shown in a separate “cost of sales statement” that supplements the main statement.

The point to watch here is the change in inventory. Not everything produced during the period is sold; the unsold portion remains on the balance sheet as inventory. Cost of sales is therefore not the total spending of the period, but only the cost attributable to the portion sold.

What does gross profit on sales measure?

Gross profit on sales is the amount remaining after cost of sales is deducted from net sales. It shows how far above its own cost the company can sell the goods it produces or buys. The ratio of gross profit on sales to net sales is tracked as the gross profit margin.

This ratio varies greatly from sector to sector. Comparing the margins of a trading distributor with those of a software developer would be misleading; a meaningful comparison is made with the same company's previous periods or with peers in the same sector. If revenue is rising while the margin is falling, the company may be buying growth through price cuts.

Operating expenses and operating profit

Operating expenses relate to running the company, not to the product itself. The Communiqué divides this group into three sub-items: research and development expenses; marketing, sales and distribution expenses; and general administrative expenses. Office rent, accounting and legal advisory fees and the salaries of management staff are generally included in general administrative expenses.

Why does operating profit matter?

Operating profit is the amount remaining after operating expenses are deducted from gross profit on sales, and it shows what the company earns from its core business. Because interest income, finance expenses and one-off items have not yet come into play, this line is the cleanest indicator of how healthy the company is “as a business”. That is why investors and banks often look at this line as their measure of profit.

If a company has weak operating profit but high net profit on the bottom line, the source of the earnings lies outside its main activity. This may come from items such as deposit interest, dividends from investees or the sale of an asset. When reading such a statement, you need to question separately, in the steps below, whether the profit is sustainable.

Other activities and finance expenses

The group of ordinary income and gains from other activities includes dividends from investees and subsidiaries, interest and commission income, and provisions no longer required. On the other side, rediscount interest expenses, commission expenses and provision expenses are shown. These items may recur regularly, but they do not arise from the company's core business.

Finance expenses are divided into short-term and long-term borrowing costs. Of two companies with the same operating profit, the one growing through debt carries a higher amount on this line. Ordinary profit is found by adding other ordinary income to operating profit and deducting other ordinary expenses and finance expenses.

The Communiqué also sets a limit in this section to protect transparency. Under General Communiqué No. 1 on the Application of the Accounting System, if an income or expense item shown under the “other” heading exceeds 20% of the total of the group it belongs to, it is shown under a separate heading. The same section also states that items with no amount will not be included in the statement.

Extraordinary items and net profit for the period

Extraordinary income and gains cover non-recurring amounts, such as income relating to prior periods. Extraordinary expenses and losses consist of items such as idle capacity expenses and losses and expenses relating to prior periods. Adding and deducting these items to and from ordinary profit gives the pre-tax profit for the period.

How is net profit for the period calculated?

Net profit for the period is the amount remaining after “provisions for taxes and other legal liabilities on profit for the period” are deducted from profit for the period. This line is the final result that belongs to the shareholders and forms the basis for profit distribution decisions. Net profit for the period, the last line of the income statement, appears on the balance sheet within equity as “net profit (loss) for the period”.

The tax provision is not calculated one-to-one from the profit in the statement. Under Corporate Income Tax Law No. 5520, corporate income tax is levied at 25% on corporate earnings; for banks and certain financial institutions, the rate is 30%. However, corporate earnings are found by adding non-deductible expenses to commercial profit and deducting exempt earnings. For this reason, the ratio of the tax provision to profit for the period is not exactly 25% for most companies.

How to read an income statement: a fictional example

The figures below are entirely fictional and were chosen only to illustrate how to read the statement. The example assumes a simplified case in which commercial profit and taxable income are the same and the general rate applies. In a real company, this assumption rarely holds.

An investor reading this statement first sees that the gross margin is 35% and compares it with the same company's previous year. They then notice that operating expenses consume one fifth of revenue. What stands out most, however, is finance expenses: about 40% of operating profit goes to interest. For this company, the fastest way to improve profitability may be to rethink its debt structure rather than grow sales.

Common mistakes we see when income statements are read

When we go through the statement with our clients, some misconceptions come up again and again:

• Looking only at the bottom line: even with the same net profit, a company whose operating profit is falling is not on the same path as one whose operating profit is rising.
• Confusing revenue with profit: if net sales are growing but gross profit on sales is not growing at the same pace, the margin is eroding.
• Equating it with cash profit: the statement is prepared on the accrual basis, and uncollected sales are also included in profit.
• Deciding on a single period: the reason the Communiqué requires the prior and current periods side by side is that a trend says more than a single figure.
• Assuming an extraordinary gain will recur: profit from a property sale should not be written into next year's budget.

If you are considering buying a company or becoming a shareholder, we recommend carrying out these checks on at least three years of statements. A single year's statement may reflect a lucky or unlucky coincidence.

What does the income statement look like at companies applying TFRS?

At companies subject to independent audit that apply Turkish Financial Reporting Standards (TFRS), the same information is presented as the “statement of profit or loss”. The current texts of the standards are available on the Turkish Financial Reporting Standards page of the Public Oversight Authority (KGK) . In the TFRS statement, the order and names of the line items may differ from the structure under tax legislation; for example, the distinction for extraordinary items is not used in the same way in these standards.

According to the Public Oversight Authority, TFRS 18 Presentation and Disclosure in Financial Statements will apply to periods beginning on or after 1 January 2027 and will introduce mandatory subtotals such as “operating profit” in the statement of profit or loss. We explained the full set of standards and its relationship with management reports in our article what is financial reporting . At foreign-owned companies, it is common to prepare an income statement for the same period both under tax legislation and under the standards; the difference in profit between the two statements must be explainable.

Turning the income statement into a decision-making tool

At Akal CPA, we see this statement not as a document issued at year-end, but as a management tool that should be read every month. Through our accounting and financial reporting services is the service under which we produce statutory statements, standards-based sets and margin analyses from the same bookkeeping system. You can find other guides supporting your investment decision investment guide category.

Last updated: 17.10.2026