Income Statements
Income Statement
• One of four financial statements issued by a
business
• Reports the amount a company has earned
between 2 balance sheet dates.
Income Statement
• Income statements cover a time of 1 year but
do not have to begin Jan 1st.
• If the statement is for less than a year it is
called an interim financial statement.
A.K.A.
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Statement of operations
Statement of income
Statement of earnings
Results of operations
Profit and loss
P&L
Reported Items
• The following are items reported on an
income statement
– Revenues
– Expenses
– Gains
– Losses
– Discontinued operations
– Extraordinary items
– Earnings per share on stock market
Rules
• There are specific rules which must be
followed when creating a company’s income
statement which are set by the government.
• In the USA it is called GAAP
Accrual Method
• The GAAP requires companies to use the
Accrual method of accounting
– Assets and liabilities are reported when the
transaction occurs not when the money is paid or
received.
Revenue
• Revenue is income that a company receives
from its normal business activities, usually
from the sale of goods and services to
customers.
• Types of revenue on income statements
– Operating revenue
– Nonoperating revenue
Revenue
• Operating revenues pertain to a corporation’s
main activities.
– Retail: sale of merchandise
– Corporation: fees for service
– Bank: interest on loans
• Nonoperating revenues result from secondary
activities.
– Earning money from a source other than main
activity of the company.
Cost Principle
• The cost principle requires that the expenses
reported on the income statement be the
actual costs based on previous transactions.
As a result, the expenses reported on the
income statement are often less than the
expenses based on the current costs.
Expenses vs Revenue
• The goal of an income statement is to
measure a company’s earnings during a period
of time.
– To do this, accountants must match expenses with
revenues.
• ex: This month’s cost of goods must be matched with
this months sales of goods.
Gross Profit
• Generally, the sales revenues and the cost of
goods sold are the 2 largest amounts reported
on the income statement.
• The difference between these two amounts is
known as the gross profit or gross margin
Sales – Cost of goods sold = Gross profit
Gross Profit
• The gross profit percentage should be
monitored to be certain that the selling prices
are being adjusted when the costs of goods
purchased is increasing.
• The dollar amount of gross profit must be
sufficient to cover the many other expenses
such as: rent, utilities, advertising,
maintenance, interest, etc.
Earnings per Share
• When a company’s stock is traded, the income
statement must also report the net income as
an amount per share of common stock
(earnings per share).
Internal Income Statements
• Internal income statements are more detailed
statements which are prepared and
distributed ONLY to people within the
company.
– These can be useful to compare sales of different
stores owned by the same company.