Income

Statement

Definition

A document generated monthly and/or

annually that reports the earnings of a
company by stating all relevant income and all
expenses that have been incurred to generate
that income.
Also referred to as a profit and loss statement.

Definition

Dated for a period of time

For the Year Ended...

Multiple-step format

Gross profit
Operating income
Income before taxes
Net income

Single-step format
Total of all revenues and gains
Less the total of all expenses and losses

Multiple-Step

Single Step

Income Statement

Periodically Prepared to report Financial

Consequences of Activities Undertaken
By Accounting Entity
Within a Certain Period of Time

Profit
More resources available at end-of-period than
beginning-of-period

Loss
Consumed more resources by the end-of-period
than it generated

KEY CONCEPTS
Net income is the best measure of business
performance
Accrual net income is a more accurate
measure of profitability than cash net income
Cash receipts and expenditures do not
always represent income and expenses
Expenses should be matched to the revenue
they generate in the same accounting period

Income Statement

Summary of Revenues and

Expenses
For a Specific Period of Time
Grouped by Class

Administrative

Sales

Cost of Goods Sold

Gross Margin/Profit
Operating Expenses

Returns and Allowances

Discounts

Net Income from Operations

Other

Selling Expenses

Salaries
Advertising
Travel
Telephone
Supplies
Depreciation

Salaries
Telephone
Legal & Professional
Supplies
Depreciation Bldg & Equip
Misc.

Interest Expense
Interest Income

Discontinued Operations
Extraordinary Events
Cumulative Effect of Change
Net Income
Earnings Per Share

Income Statement - Continuing

Operations
Allied Electronics Corporation
Income Statement
Year Ended December 31, 20x5
Sales revenue
$500,000
Cost of goods sold
240,000
Gross margin
$260,000
Operating expenses
181,000
Operating income
$ 79,000

Income Statement - Continuing

Operations
Operating income
Other gains (losses):
Loss on restructuring operations
Gain on sale of machinery
Income from continuing operations
before income tax
Income tax expense
Income from continuing operations

$79,000
( 8,000)
19,000
$90,000
36,000
$54,000

Income Statement - Special Items

Discontinued operations: $35,000,
less income tax of $14,000
Income before extraordinary items
and cumulative effect of change
in depreciation method
Extraordinary flood loss, $20,000,
less income tax savings of $8,000
Cumulative effect of change in
depreciation method, $10,000,
less income tax of $4,000
Net income

21,000
$75,000
(12,000)
6,000
$69,000

Income includes all the income generated by

the business.
Cost of goods includes all the costs related
to the sale of products in inventory.
Gross profit margin is the difference
between revenue and cost of goods. Gross
profit margin can be expressed in dollars, as a
percentage, or both. As a percentage, the GP
margin is always stated as a percentage of
revenue.

 Operating

expenses include all

overhead and labor expenses
associated with the operations of the
business.
Total expenses are the sum of cost of
goods and operating expenses.

 Net

profit is the difference between

gross profit margin and total expenses.
The net income depicts the business'
debt and capital capabilities.
Depreciation reflects the decrease in
value of capital assets used to generate
income. It's also used as the basis for a
tax deduction and an indicator of the
flow of money into new capital.

 Earnings

before interest and

taxes shows the capacity of a business
to repay its obligations.
Interest includes all interest payable for
debts, both short-term and long-term.
Taxes includes all taxes on the
business.
Net profit after taxes shows the
company's real bottom line.

Income from Continuing

Operations
A measure

of the part of the business

expected to be ongoing.
Used to predict future income.

Continuing Operations
The

company restructured operations at

a loss of $8,000.
Report as Other item part of
continuing operations, but falls outside
of main business endeavor

Other Income Statement Items

Discontinued Operations
Extraordinary Gains and Losses
(Extraordinary Items)

Must be both infrequent

seldom happening or occurring

and Unusual

not ordinarily encountered

Cumulative Effect of a Change in Accounting

Method

Extraordinary Items

Unusual for the company and infrequent

Losses due to natural disasters
Expropriations
the action of the state in taking or modifying
the property rights of an individual in the
exercise of its sovereignty

An Exception
Material gains/losses from extinguishment of debt
(to be reported as extraordinary item)

Although

the basics of an
income statement are the same
from business to business,
there are differences between
services, merchandisers, and
manufacturers when it comes
to the accounting of inventory.

For Service Businesses

inventory

includes supplies or spare

parts--nothing for manufacture or resale

Cost of Goods Sold

The cost of goods that were sold to produce revenue (cost of

services in a service company)
Retailer
Beginning Inventory

+ Purchases

Manufacturer
Beginning Inventory

Ending Inventory

+ Cost of Goods
Manufactured

= Cost of Goods Sold

Ending Inventory
= Cost of Goods Sold

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Chapter 4, Slide #21

For Merchandisers
Account

for their resale inventory under

cost of goods sold, also known as cost
of sales
This (cost of sales) refers to the total
price paid for the products sold during
the income statement's accounting
period.

For Merchandisers
Freight

and delivery charges are

customarily included in this figure
Accountants segregate costs of goods
on an operating statement because it
provides a measure of gross profit
margin when compared with sales, an
important yardstick for measuring the
firm's profitability.

For Merchandisers
For

a retailer or wholesaler, cost of

goods sold is equal to total inventory at
the beginning of the accounting period
plus any merchandise purchased,
including freight costs, minus the
inventory present at the end of the
accounting period. This is your total
cost of goods sold.

For Manufacturing
account

for cost of goods sold in the

same manner as merchandisers by
reporting beginning and ending
inventories, as well as any purchases
made during the accounting period,
their approaches are also different
because they track inventory through
three phases.

For Manufacturing
Raw

material is purchased to create a

finished product.
Work-in-progress is inventory that is
partially assembled.
Finished products are inventory fully
assembled and available for sale.

For Manufacturing
Associated

with this process are other

costs, such as direct labour and factory
overhead.
To account for all these costs,
manufacturers usually report them on a
separate statement called the "cost of
goods manufactured."

For Manufacturing
Cost

of goods manufactured is added to

the finished goods inventory at the
beginning of the inventory, resulting in
total cost of goods available for sale.
The finished goods inventory present at
the end of the reporting period is
subtracted from this amount to produce
the cost of goods sold.