Building the Income Statement, Step by Step

The income statement is a simple chain of deductions, each line falling from the one before it. Let’s walk through it for Noor Trading Co.:

Line	Description	Typically forecast as
Revenue	Total sales during the period	A growth % on prior-year revenue
COGS	Direct cost of producing/purchasing what was sold	A % of revenue (sets gross margin)
Gross Profit	Revenue − COGS	—
Opex	Cost of running the business (admin, marketing, salaries…)	Usually a % of revenue
EBIT	Gross Profit − Opex	—
Interest Expense	Interest on outstanding debt	Debt balance × interest rate
EBT	EBIT − Interest Expense	—
Tax	Income tax owed	EBT × tax rate
Net Income	EBT − Tax	The number that feeds the rest of the model

Why use percentages instead of fixed numbers?

When building a valuation or forecast model, you can’t assume expenses stay a fixed number — they should scale with the level of activity. That’s why analysts tie most line items to a percentage of revenue (a “revenue driver”), which makes the model dynamic: change the growth assumption, and everything else moves with it automatically.

Gross margin % and opex as a % of revenue are two of the most important efficiency indicators for a company, and they vary widely by industry.

In the next lesson, we’ll see exactly how net income flows into the cash flow statement and balance sheet — and try it hands-on in an interactive lab.