The Income Statement

Think of the income statement as a waterfall. Money pours in at the top, and at each level, some of it drains away — until whatever survives at the bottom is the profit.

Top of the waterfall — Revenue (also called "sales" or "top line"): the total money from selling products or services. A restaurant's revenue is every bill paid by every customer.

First drain — Cost of Goods Sold ("COGS" — the direct cost of making what you sell): the restaurant's ingredients. Revenue minus this gives Gross Profit — what's left after just the raw cost of the product itself.

Second drain — Operating Expenses: everything needed to run the place that isn't the product itself — staff salaries, rent, electricity, marketing. What survives is Operating Profit (you'll also see "EBIT" — earnings before interest and taxes — nearly the same idea). This number matters enormously: it shows whether the actual business makes money, before any financial engineering.

Final drains — Interest and Tax: interest paid on loans, then the government's cut. What's left at the very bottom is Net Profit (the "bottom line" — yes, that's where the phrase comes from).

Why the order matters: two restaurants can have identical revenue and totally different bottom lines. One controls ingredient costs and rents a modest space; the other splurges on both. The income statement shows you exactly which level of the waterfall is leaking.

One decoded jargon pair you'll meet constantly: YoY (year-over-year — this quarter vs. the same quarter last year) and QoQ (quarter-over-quarter — this quarter vs. the previous one). YoY matters more for seasonal businesses — comparing an AC maker's summer quarter to its winter quarter (QoQ) tells you almost nothing.