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. 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.