Income Statement
Chapter 4
What is Income Statement?
What is the major difference between
Income Statement and Balance Sheet?
Income Statement
Presents the revenues
And expenses and
resulting net income
Or net loss
For a specific
Period of time
Balance Sheet
Reports the assets,
liabilities, and
owner’s equity
At a specific date
Usefulness of the income Statement
 Evaluate the past performance of the enterprise
 Predict future performance
 Assess the risk of achieving future cash flows
Limitations of the Income Statement
 Items that might be relevant but cannot be reliably
measured are not reported
 Some numbers depend on accounting methods
used
 Some numbers depend on judgments and estimates
Format of the Income Statement




Gross Profit is the excess of net sales over the cost of goods sold.
Net Income is the amount by which revenues exceed expenses.
Net Loss is the amount by which expenses exceed revenues.
Revenue is the gross increase in owner’s equity resulting from
business activities entered into for the purpose of earning income.
 Expense is the cost of assets consumed or services used in the
process of earning revenue.
 Net sales “sales less sales returns and allowance and sales
discount”
 Cost of goods sold is the total cost of merchandise sold during the
period.
Elements of income statement
 Revenues
 Expenses
 Gains
 Losses
Single-Step Income Statement
Two groups exist
Revenues
Expenses
 Expenses are deducted from revenues to arrive at net income or
net loss
 Income tax is reported separately as the last item before net income
to indicate its relationship to income before income tax
Dan Deines Company
Income Statement
For the year ended Dec 31, 2004
Revenues
Net Sales
Dividend Revenue
Rental Revenue
Total Revenues
Expenses
Cost of Goods Sold
Selling Expenses
Administrative Expenses
Interest Expense
Income Tax Expense
Total Expenses
Net Income
Earning per common share
2,972,413
98,500
72,910
3,143,823
1,982,542
453,028
350,771
126,060
66,934
2,979,489
164,489
1.74
Multiple-Step Income Statement
It provides more useful information because:
1. It separates operating and non-operating activities.
2.
It classifies expenses by function.
3.
It allows instant comparisons and ratio computations
which evaluate performance of the company
Dan Deines Company
Income Statement
For the year ended Dec 31, 2004
Revenues
Sales
Less: sales discount
sales returns and allowance
Net Sales Revenues
Cost of Goods Sold
Merchandise inventory, Jan 1, 2004 (beginning inventory)
Purchases
1,989,693
Less: Purchase discount
10,270
Purchase returns and allowance
9,000
Net Purchases
1,970,423
Add: Freight and transportation-in
40,612
Cost of Goods Purchased
Cost of goods available for sale
Less: Inventory, Dec 31
Cost of goods sold
Gross Profit on sales
3,053,081
24,241
56,427
(80,668)
2,972,413
461,219
2,011,035
2,472,254
489,713
(1,982,541)
989,872
Gross Profit on sales
Operating Expenses
Selling expenses
Sales commissions
Sales office salaries
Advertising expense
Freight-out and transportation
Shipping supplies and expense
Administrative expenses
Officers’ salaries
Legal and professional services
Utilities expense
Insurance expense
Depreciation of building
Depreciation of office equipment
Postage and stationery
Travel and entertainment
Tel and internet expense
Miscellaneous office expense
Income from Operations
989,872
202,644
59,200
38,315
41,209
24,712
366,080
247,200
23,721
23,275
17,029
27,064
16,000
19,663
48,940
12,215
2,611
437,719
(803,799)
186,073
Income from Operations
Other revenues and gains
Dividend revenue
Gain on sale of assets
Rental revenue
186,073
98,500
20,910
50,000
Other expenses and losses
Loss on sale of investments
Interest on bonds and notes
20,000
106,060
171,410
357,483
(126,060)
Income before income tax
Income tax
231,423
(66,934)
Net income for the year
164,489
Earnings per common share
1.74
Income Statement Sections
1- Operating Section
A- Sales or Revenue Usually presented as sales minus sales
discounts, returns, and allowances.
B- Cost of Goods represents the amount a product cost you.
C- Selling expenses represent expenses needed to sell
products (e.g., sales salaries and commissions, advertising, freight,
shipping, depreciation of sales equipment).
D- General and administrative expenses represent expenses
to manage the business (e.g., officer salaries, legal and professional
fees, utilities, insurance, depreciation of office building and
equipment, stationery supplies)
2- Non-operating section
A- Other revenues or gains - revenues and gains from other
than primary business activities (e.g. rent, patents). It also includes
unusual gains and losses that are either unusual or infrequent, but
not both (e.g. sale of securities or fixed assets).
B- Other expenses or losses - expenses or losses not related
to primary business operations.
3- Income Tax
4- Irregular items
A- Discontinued operations (e.g. Shifting business location,
stopping production temporarily).
 Discontinued operations are classified as a separate items shown in
a separate section in the income statement after continuing
operations but before extraordinary items.
B- Extraordinary items - unusual (abnormal) and infrequent,
for example, unexpected nature disaster, expropriation, prohibitions
under new regulations. Note: nature disaster might not qualify
depending on location.
 Separate section in the income statement entitled “Extraordinary
items” between discontinued operations and changes in principles.
C- Changes in accounting principle - for example, changing
method of computing depreciation from straight-line to sum-of-theyears'-digits. However, changes in estimates (e.g. estimated useful
life of a fixed asset) do not qualify.
 The effect on net income of adopting the new accounting principle
should be disclosed as a separate item following extraordinary
items in the income statements. “between extraordinary items
and net income”
5- Earnings per share
Net Income – Preferred Dividends = Earnings per Share
Weighted Average of Common
Shares Outstanding
EPS is “the net income earned by each share of outstanding common
stock”.
Outstanding stock is “capital stock that has been issued and is being
held by stockholders”.
Dividend is “a distribution by a corporation to its stockholders on
proportional basis”.
Summary
Income before income tax
Income tax
Discontinued operations
Extraordinary items
Changes in principles
Net income
EPS
Exercise
Presented below are selected ledger accounts of Garden Corporation
at Dec 31, 2004
Sales
3,040,000
Sales discount
40,000
Freight-out
12,000
Officers’ salaries
120,000
Inventory, Jan 1, 2004
40,000
Loss due to earthquake
275,200
Purchases
2,020,000
Gain on sales of investments 200,000
Purchase returns and allowance 20,000
Inventory, Dec 31
88,000
Depreciation of Furniture
Sales commissions
Miscellaneous expense
Loss on sale of assets
Insurance expense
Tel expense
Advertising expense
Rent expense
Freight-in
Instructions
Prepare the income statement for 2004. Assume that 100,000 shares of common stock are
outstanding. And dividends applicable to preferred stock SR10,000.
15,000
17,000
3,000
6,000
4,000
5,000
8,000
30,000
8,000
Garden Corporation
Income Statement
For the year ended Dec 31, 2004
Revenues
Sales
Less: sales discount
Net Sales Revenues
Cost of Goods Sold
Inventory, Jan 1, 2004
Purchases
Less: Purchase returns and allowance
Net Purchases
Add: Freight-in
Cost of Goods Purchased
Cost of goods available for sale
Less: Inventory, Dec 31
Cost of goods sold
Gross Profit on sales
40,000
3,040,000
(40,000)
3,000,000
40,000
2,020,000
20,000
2,000,000
8,000
2,008,000
2,048,000
88,000
(1,960,000)
1,040,000
Garden Corporation
Income Statement
For the year ended Dec 31, 2004
Gross Profit on sales
Operating Expenses
Selling expenses
Sales commissions
Advertising expense
Freight-out
Administrative expenses
Officers’ salaries
Insurance expense
Depreciation of Furniture
Rent expense
Tel expense
Miscellaneous expense
Income from Operations
1,040,000
17,000
8,000
12,000
120,000
4,000
15,000
30,000
5,000
3,000
37,000
177,000
(214,000)
826,000
Garden Corporation
Income Statement
For the year ended Dec 31, 2004
Income from Operations
Other revenues and gains
Gain on sale of investments
Other expenses and losses
Loss on sale of assets
Income before income tax
Income tax
(20%)
Income before Extraordinary items
Extraordinary items:
Loss due to earthquake
Net income for the year
Earnings per common share
826,000
200,000
1,026,000
(6,000)
1,026,000
(205,200)
820,800
(275,200)
545,600
5.3