# Income Statement Structure for Leverage Analysis
The leverage chapter relies on a vertical income statement that exposes fixed costs at two distinct points — operating fixed costs (above EBIT) and financial fixed costs (interest, preference dividend). You must be able to draw this format from memory before attempting any leverage problem.
## The Standard Format
| Line item | Treatment |
|---|---|
| Sales | XXX |
| (–) Variable Cost | (XXX) |
| Contribution | XXX |
| (–) Fixed Cost (operating) | (XXX) |
| EBIT / Operating Profit | XXX |
| (–) Interest | (XXX) |
| EBT | XXX |
| (–) Tax (e.g., 30%) | (XXX) |
| EAT / PAT | XXX |
| (–) Preference Dividend | (XXX) |
| Earnings Available to Equity Shareholders (EAES) | XXX |
| ÷ No. of equity shares | XXX |
| EPS | EAES ÷ No. of shares |
| (–) Dividend distributed | (XXX) |
| Retained Earnings | XXX |
## Two Critical Conversions
Before-tax ↔ After-tax
- After-tax = Before-tax × (1 − t)
- Before-tax = After-tax ÷ (1 − t)
Example: PBT ₹1,00,000 at 30% tax → PAT = 1,00,000 × 0.70 = ₹70,000.
Preference Dividend grossing-up
Preference dividend is paid out of PAT, so it is effectively a post-tax outflow. To compare its real burden against pre-tax items (like interest), gross it up:
> Pre-tax equivalent of Pref Dividend = Pref Dividend ÷ (1 − t)
This is why DFL in many problems uses `EBIT / [EBIT − Interest − PD/(1−t)]`.
## Why the format matters
- DOL is read between Contribution and EBIT (effect of operating fixed costs).
- DFL is read between EBIT and EPS (effect of interest & pref dividend).
- DCL is read between Contribution and EPS — the whole stack.
If you skip a row (e.g., forgetting preference dividend), every leverage and EPS figure below it will be wrong.