The income statement

The income statement answers one question for one period: did the business earn more than it consumed? It reports revenue earned and expenses incurred between two dates, whether or not cash changed hands in that window. A company can report a profit and run out of money in the same year, which is why the cash flow statement exists alongside it.

When revenue counts

Revenue is recorded when it is earned. Under IFRS 15 and its US equivalent, ASC 606, a company recognizes revenue when it satisfies a performance obligation by transferring a good or service to the customer. Both standards use the same five steps:

1. Identify the contract with the customer.
2. Identify the performance obligations in it.
3. Determine the transaction price.
4. Allocate the price to the obligations.
5. Recognize revenue as each obligation is satisfied.

For a cafe, most of this collapses into a single moment: the latte is handed over and the sale is complete. Two of Northside's revenue streams are more interesting.

Gift cards are cash received before the obligation is satisfied. Northside sold $5,000 of cards in 2025 and recorded them as unearned revenue, a liability. When customers redeemed $3,200 of cards, that amount moved to revenue. The remaining $1,800 stays a liability until it is redeemed. Both standards also contain rules for "breakage," the portion of cards a company expects never to be redeemed, but Northside has no history yet, so it recognizes nothing for breakage in its first year.

Catering is revenue earned before cash arrives. Northside delivered $14,000 of catering on 30-day terms. The revenue belongs in 2025 because the food was delivered in 2025. The $3,500 still unpaid at year end is an asset, accounts receivable.

Cost of goods sold and gross profit

Cost of goods sold is the cost of the inventory that left the building as product. Northside uses a periodic system: it records purchases to inventory, counts what is left at year end, and treats the difference as used.

Opening inventory + Purchases − Closing inventory = Cost of goods sold

For 2025: 0 + 98,000 − 6,000 = $92,000. Gross profit is revenue less cost of goods sold, $218,000, or 70.3% of revenue. IAS 2 requires inventory to be measured at the lower of cost and net realizable value. For coffee beans and milk with short shelf lives, spoilage is the main way the second half of that rule shows up: waste that never reaches a cup still ends up in cost of goods sold through the count.

Gross margin tells you whether the product itself is priced well against its inputs. It says nothing about rent, wages or interest.

Operating expenses

Below gross profit come the costs of running the place: wages, rent, utilities, card processing, insurance and depreciation. Each is recorded in the period it relates to. Northside paid $39,000 in rent during 2025, but only $36,000 belongs to the year. Staff earned $104,000 in wages, but only $100,000 was paid before December 31.

Depreciation deserves attention because it involves no cash at all in the year it is recorded. Northside spent $72,000 on equipment on January 3. IAS 16 requires that cost to be spread over the asset's useful life on a systematic basis. With a six-year life and no residual value, straight-line depreciation is $12,000 a year. The cash left in January; the expense arrives in twelve-thousand-dollar pieces for six years.

The subtotals and what each one says

Operating income ($35,200, or 11.4% of revenue) is what the business earns from running a cafe, before the costs of how it is financed and taxed. Interest expense comes next, because it depends on how much the owners chose to borrow, which is a financing decision. Then income tax, then net income of $29,412.

The presentation of these subtotals is changing for companies reporting under IFRS. IFRS 18, which replaces IAS 1 for annual periods beginning on or after January 1, 2027, requires income and expenses to be classified into operating, investing and financing categories, with defined subtotals including operating profit. Many private Canadian companies report under ASPE instead, and US companies follow US GAAP; both still produce a multi-step statement much like Northside's.

Reading margins with care

Margins are ratios to revenue. A 9.5% net margin means that for every dollar of sales, Northside kept about nine and a half cents after every cost. On its own, one year of one company's margin tells you little. Margins become useful when compared with the same company's prior periods, with a budget, or with published figures for similar businesses. Northside has no prior year yet, so its first-year statement mostly serves as the baseline for 2026.