The Income Statement
buttons.Elements of the Income Statement
The income statement is a financial statement
that is used to help determine the past financial performance of the
enterprise, predict future performance, and assess the capability of
generating future cash flows. It is also known as the profit and loss statement (P&L), statement of operations, or statement of earnings.
A Sample Income Statement Expenses are listed on a company's income statement.
The income statement consists of revenues (money received from the sale
of products and services before expenses are taken out, also known as
the "top line") and expenses, along with the resulting net income or
loss over a period of time due to earning activities. Net income (the
"bottom line") results after all revenues and expenses have been
accounted for. The income statement reflects a company's performance
over a period of time. This contrasts with the balance sheet, which represents a single moment in time.
Methods for Constructing the Income Statement
The income statement can be prepared using one of two methods: single or multi-step.
The Single-Step income statement totals revenues and then subtracts all expenses to find the bottom line.The more complex Multi-Step income statement (as the name implies) takes several steps to find the bottom line. First, operating expenses are subtracted from gross profit, yielding income from operations. The other revenues are added, and other expenses are subtracted, yielding income before taxes. The final step is to deduct taxes, which finally produces the net income for the period measured.
Operating Revenues and Expenses
The operating section includes revenue and expenses. Revenue consists of cash inflows or other enhancements of an entity's assets. It is often referred to as gross revenue or sales revenue. Expenses consist of cash outflows or other use-up of assets or incurrence of liabilities.
Elements of expenses include:
-
Cost of Goods Sold (COGS):
the direct costs attributable to goods produced and sold by a business.
It includes items such as material costs and direct labor.
-
Selling, General, and Administrative Expenses (SG&A): combined payroll costs, except for what has been included as direct labor.
-
Depreciation and amortization: charges with respect to fixed assets (depreciation) and intangible assets (amortization) that have been capitalized on the balance sheet for a specific accounting period.
- Research & Development (R&D): expenses included in research and development of products.
Non-operating Revenues and Expenses
The non-operating section includes revenues and gains from non-primary business activities (such as rent or patent income); expenses or losses not related to primary business operations (such as foreign exchange losses); gains that are either unusual or infrequent, but not both; finance costs (costs of borrowing, such as interest expense); and income tax expense.
In essence, if an activity is not related to making or selling products or services but still affects the business's income, it is a non-operating revenue or expense.
Reading the Income Statement
Certain material (significant) items must be disclosed separately in the notes. These could include restructurings, discontinued operations, and disposals of investments or property, plant, and equipment. Irregular items are reported separately so that users can better predict future cash flows.
The "bottom line" of an income statement – often, literally, the last line of the statement – is the net income calculated after subtracting expenses from revenue. It is important to investors as it represents the profit for the year attributable to the shareholders. For companies with shareholders, earnings per share (EPS) are also an important metric and must be disclosed on the income statement.
Key Points
- The income statement consists of revenues and expenses along with the resulting net income or loss over a period of time due to earning activities. The income statement shows investors and management if the firm made money during the period reported.
- The operating section of an income statement includes revenue and expenses. Revenue consists of cash inflows or other enhancements of assets of an entity, and expenses consist of cash outflows or other using-up of assets or incurring of liabilities.
- The non-operating section includes revenues and gains from non-primary business activities, items that are either unusual or infrequent, finance costs like interest expense, and income tax expense.
- The "bottom line" of an income statement is the net income that is calculated after subtracting the expenses from revenue. It is important to investors – also on a per-share basis (as earnings per share, EPS) – as it represents the profit for the accounting period attributable to the shareholders.
Terms
- Net Income – Gross profit minus operating expenses and taxes.
- Gross Profit – The difference between net sales and the cost of goods sold.
- Income Statement – a calculation which shows the profit or loss of an accounting unit during a specific period of time, providing a summary of how the profit or loss is calculated from gross revenue and expenses
- Income Bond – a debt instrument where coupon payments are only made if the issuer can afford it
- Statement of Cash Flows – a financial document that shows how changes in balance sheet accounts and income affect cash and cash equivalents, and breaks the analysis down to operating, investing, and financing activities
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