Chapter 9:
Accounting
Preparing Financial Statements – Income Statement
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Preparing Financial Statements –
Income Statement
The Income Statement
The income statement is used to calculate and report the profit or loss
from business operations.
The income statement reports the profit or loss for a period of time – week,
month, quarter (3 months), or year.
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Preparing Financial Statements –
Income Statement
Review:
A business is an organization that produces or sells goods or
services to satisfy needs, wants and demands of consumers for the
purpose of making a profit.
Revenues & Expenses:
Business profits generate from revenues & expenses:
Revenues – the money (or promise of money), received from the sale
of goods or services.
Expenses – the money spent to create revenue (ex. salaries,
advertising)
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Preparing Financial Statements –
Income Statement
Examples:
1. Calculate the profit/loss:
A business sells a cellphone for $150.
It cost the business $85 to produce the cellphone.
Revenue = $150, Expense = $85
Profit = $100 - $85
= $65
2. Calculate the profit/loss:
A business sells a cellphone for $75.
It cost the business $85 to produce the cellphone.
Revenue = $75, Expense = $85
Loss = $75- $85
= $10
When a loss is
reported on an
income
statement it is
put in
parentheses:
($10)
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NOT: -$10
Preparing Financial Statements
– Income Statement
Steps in preparing the Income Statement:
Step 1: Fill in the Statement Headings: company
name/financial statement name/date of completion
Mark’s Repair Shop
Income Statement
For the month ending October 30, 2015
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Preparing Financial Statements
– Income Statement
Steps in preparing the Income Statement:
Step 2: Organize the Revenue Section: all sources of
revenue should be listed.
Revenue
Repairs Revenue
Total Revenue
$9 900
$9 990
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Preparing Financial Statements
– Income Statement
Steps in preparing the Income Statement:
Step 3: Organize the Expense Section: listed in order of
highest to lowest.
Expenses
Salaries
Rent
$2 600
2 000
Advertising
850
Utilities
235
Insurance
150
Delivery Expense
770
Total Expenses
$6 790
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Preparing Financial Statements
– Income Statement
Steps in preparing the Income Statement:
Step 4: Calculate Net Income (Profit) or Net Loss:
Total Revenue – Total Expenses = Net Income (Loss)
$9900 – $6 690 = $3 110
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Preparing Financial Statements
– Income Statement
Steps in preparing the Income Statement:
Step 4: PUT IT ALL TOGETHER!!
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Preparing Financial Statements – Income
Statement
Step 1
Statement Headings
Mark’s Repair Shop
Step 5:
Income Statement
For the month ending October 30th, 2015
Step 2
List Revenues
tep 3
st Expenses
Revenue
Repairs Revenue
$9 900
Total Revenue
$9 900
Expenses
Salaries
Rent
$2 600
2 000
Advertising
850
Utilities
235
Insurance
150
Delivery Expense
770
Total Expenses
$6 690
Net Income
$3 110
Step
4
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Calculate Net Income
Preparing Financial Statements
– Income Statement
The Matching Principle:
The expenses reported on the income
statement should only be shown if they were
incurred to generate the revenue for that
period.
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Preparing Financial Statements
– Income Statement
The Matching Principle:
Mark’s Repair Shop Example:
Monthly Revenue:
Monthly Expenses
May $5 000
May: Advertising $400, Salaries $1200
June $6 000
June: Advertising $900, Salaries $2 000
July $1 000
July: Advertising $1200, Salaries $500
Calculate Net Profit /(Net Loss) for each period:
For the month ending May 31st, 2015:
Net Profit = $5000 - $400 - $1200 = $3400
For the month ending June 30th, 2015:
Net Profit = $6000 - $900 - $2000 = $3100
For the month ending July 31st, 2015:
Net Loss = $1000 - $1200 - $500 = ($700)
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