Chapter 2 - Income Statement
Usefulness
Evaluate past performance.
Predicting future performance.
Help assess the risk or uncertainty
of achieving future cash flows.
Chapter
4-1
LO 1 Understand the uses and limitations of an income statement.
Income Statement
Limitations
Companies omit items that cannot
be measured reliably.
Income is affected by the
accounting methods employed.
Income measurement involves
judgment.
Chapter
4-2
LO 1 Understand the uses and limitations of an income statement.
Format of the Income Statement
Elements of the Income Statement
Revenues – Inflows or other enhancements of assets or
settlements of its liabilities that constitute the entity’s
ongoing major or central operations.
Examples of Revenue Accounts
Sales
Fee revenue
Interest revenue
Dividend revenue
Rent revenue
Chapter
4-3
LO 1 Understand the uses and limitations of an income statement.
Format of the Income Statement
Elements of the Income Statement
Expenses – Outflows or other using-up of assets or
incurrences of liabilities that constitute the entity’s ongoing
major or central operations.
Examples of Expense Accounts
Cost of goods sold
Depreciation expense
Interest expense
Rent expense
Salary expense
Chapter
4-4
LO 1 Understand the uses and limitations of an income statement.
Format of the Income Statement
Elements of the Income Statement
Gains – Increases in equity (net assets) from
peripheral or incidental transactions.
Losses - Decreases in equity (net assets) from
peripheral or incidental transactions.
Gains and losses can result from
sale of investments or plant assets,
settlement of liabilities,
write-offs of assets.
Chapter
4-5
LO 1 Understand the uses and limitations of an income statement.
Single-Step Format
The single-step statement
consists of just two
groupings:
Revenues
Expenses
SingleStep
Net Income
No distinction between
Operating and Non-operating
categories.
Chapter
4-6
Income Statement (in thousands)
Revenues:
Sales
Interest revenue
Total revenue
$ 285,000
17,000
302,000
Expenses:
Cost of goods sold
Selling expense
Administrative expense
Interest expense
Income tax expense
Total expenses
149,000
10,000
43,000
21,000
24,000
247,000
Net income
$ 55,000
Earnings per share
$
0.75
LO 2 Prepare a single-step income statement.
E4-4: Prepare an income
statement from the data
below.
Single-Step Format
Income Statement
For the year ended Dec. 31, 2011
Administrative expense:
Officers' salaries
Depreciation
Revenues:
$ 4,900
3,960
Cost of goods sold
63,570
Rental revenue
17,230
Selling expense:
Sales
$
Rental revenue
96,500
17,230
Total revenues
113,730
Expenses:
Cost of goods sold
63,570
17,150
Transportation-out
2,690
Selling expense
Sales commissions
7,980
Administrative exense
8,860
Depreciation
6,480
Interest expense
1,860
Income tax expense
7,580
Sales
96,500
Income tax expense
7,580
Interest expense
1,860
Chapter
4-7
Solution on
notes page
Total expenses
Net income
99,020
$
14,710
LO 2 Prepare a single-step income statement.
Single-Step Format
Review
The single-step income statement emphasizes
a. the gross profit figure.
b. total revenues and total expenses.
c. extraordinary items more than it is emphasized
in the multiple-step income statement.
d. the various components of income from
continuing operations.
Chapter
4-8
LO 2 Prepare a single-step income statement.
Multiple-Step Format
Income Statement Sections
1. Operating section
2. Nonoperating section
3. Income tax
4. Discontinued operations
5. Extraordinary items
6. Earnings per share
Chapter
4-9
LO 3 Prepare a multiple-step income statement.
Multiple-Step Format
Background
Separates operating transactions from
nonoperating transactions.
Matches costs and expenses with related
revenues.
Highlights certain intermediate components of
income that analysts use.
Chapter
4-10
LO 3 Prepare a multiple-step income statement.
Multiple-Step Format
The presentation
divides information
into major sections.
1. Operating Section
2. Nonoperating
Section
3. Income tax
Chapter
4-11
Income Statement (in thousands)
Sales
$ 285,000
Cost of goods sold
Gross profit
149,000
136,000
Operating expenses:
Selling expenses
Administrative expenses
Total operating expense
10,000
43,000
53,000
Income from operations
83,000
Other revenue (expense):
Interest revenue
Interest expense
Total other
Income before taxes
Income tax expense
17,000
(21,000)
(4,000)
79,000
24,000
Net income
$ 55,000
Earnings per share
$
0.75
LO 3 Prepare a multiple-step income statement.
Illustration (E4-4):
Prepare an income statement
from the data below.
Administrative expense:
Officers' salaries
Depreciation
Multiple-Step Format
Income Statement
For the year ended Dec. 31, 2011
Sales
$ 4,900
3,960
Cost of goods sold
63,750
Operating Expenses:
Rental revenue
17,230
Selling expense
2,690
Sales commissions
7,980
Income from operations
Depreciation
6,480
Other revenue (expense):
Sales
32,750
17,150
Administrative exense
Transportation-out
96,500
Income tax expense
7,580
Interest expense
1,860
8,860
Total operating expenses
26,010
6,740
Rental revenue
17,230
Interest expense
(1,860)
Total other
15,370
Income before tax
22,110
Income tax expense
Chapter
4-12
Solution on
notes page
96,500
63,750
Gross profit
Cost of goods sold
Selling expense:
$
Net income
7,580
$
14,530
Multiple-Step Format
Review
A separation of operating and non operating activities of
a company exists in
a.
both a multiple-step and single-step income
statement.
b. a multiple-step but not a single-step income
statement.
c.
a single-step but not a multiple-step income
statement.
d. neither a single-step nor a multiple-step income
statement.
Chapter
4-13
LO 3 Prepare a multiple-step income statement.
Chapter
4-14
An Income Statement
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Chapter
4-15
Sales
 Minus Cost of Goods Sold
= Gross Profit
Minus Operating Expenses
 Selling expenses
 General and Administrative expenses
 Depreciation and Amortization Expense
= Operating income (EBIT)
Minus Interest Expense
= Earnings before taxes (EBT)
Minus Income taxes
= Net income (EAT)
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An Income Statement
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Chapter
4-16
Sales
 Minus Cost of Goods Sold
= Gross Profit
Minus Operating Expenses
 Selling expenses
 General and Administrative expenses
 Depreciation and Amortization Expense
= Operating income (EBIT)
Minus Interest Expense
= Earnings before taxes (EBT)
Minus Income taxes
= Net income (EAT)
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Sample Income Statement
Chapter
4-17
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Evaluating a Firm’s EPS
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Chapter
4-18
We can use the income statement to determine the earnings
per share (EPS) and dividends.
EPS = Net income/Number of shares outstanding
Example 1: A firm reports a net income $90 million and has
35 million shares outstanding, what will be the earnings per
share (EPS)?
EPS = Net income ÷ Number of shares
= $90 million ÷ $35 million
= $2.57
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Evaluating a Firm’s Dividends per
share
 Dividends per share = Dividends paid ÷
Number of shares
 Example 2: A firm reports dividend payment
of $20 million on its income statement and
has 35 million shares outstanding. What will
be the dividends per share?

Chapter
4-19
Dividends per share = dividend payment ÷
Number of shares
= $20 million ÷ $35 million
= $0.57
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
Connecting the Income Statement and the
Balance Sheet
What can the firm do with the net income?:
1.
2.
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
Chapter
4-20
Pay dividends to shareholders, and/or
Reinvest in the firm
Example 3: Review examples 1 & 2. How
much was retained or reinvested by the
firm?
Amount retained = Net Income – Dividends
= $90m - $20m = $70m
The firm’s balance on retained earnings will
increase by $70 million on the balance sheet.
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
Interpreting Firm Profitability using the
Income Statement
What can we learn from Boswell Inc.’s
income statement?
The firm has been profitable as its revenues
exceeded its expenses.
The gross profit margin (GPM)
= gross profits ÷ sales
= $675 million ÷ $2,700 million
= 25%
1.
2.

Chapter
4-21
GPM indicates the firm’s “mark-up” on its cost of goods sold
per dollar of sales.
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Interpreting Firm Profitability using the
Income Statement (cont.)
The operating profit margin
= net operating income (EBIT)÷ sales
= $382.5 million ÷ $2,700 million
= 14.17%
4.
Net profit margin:
= net profits (Net income) ÷ sales
= $204.75 million ÷ $2,700 million
= 7.58%
These profit margins (gross profit margin, operating profit margin, and net profit margin)
should be closely monitored and compared to previous years and those of
competing firms.
3.
Chapter
4-22
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