FINANCIAL

STATEMENT
INCOME STATEMENT
 Income Statement
• An Income statement or profit and loss account is
one of the financial statements of a company and
shows the company’s revenues and expenses
during a particular period.
• It indicates how the revenues are transformed into
the net income or net profit.
• The purpose of the income statement is to
show managers and investors whether the
company made or lost money during the period
being reported.
• The income statement can be prepared in one of two
methods.
1. The Single Step income statement totals revenues and
subtracts expenses to find the bottom line.
2. The Multi-Step income statement takes several steps to find
the bottom line: starting with the gross profit, then
calculating operating expenses. Then when deducted from
the gross profit, yields income from operations. Adding to
income from operations is the difference of other revenues
and other expenses. When combined with income from
operations, this yields income before taxes. The final step is to
deduct taxes, which finally produces the net income for the
period measured.
Multi-step Income Statement
 Operating Section
• Revenue - Cash inflows or other enhancements of assets of an
entity during a period from delivering or producing goods,
rendering services, or other activities that constitute the entity's
ongoing major operations. It is usually presented as sales minus
sales discounts, returns, and allowances. Every time a business
sells a product or performs a service, it obtains revenue. This
often is referred to as gross revenue or sales revenue.
• Expenses - Cash outflows or other using-up of assets or
incurrence of liabilities during a period from delivering or
producing goods, rendering services, or carrying out other
activities that constitute the entity's ongoing major operations.
• Cost of Goods Sold (COGS) / Cost of Sales - represents the
direct costs attributable to goods produced and sold by a
business (manufacturing). It includes material costs, direct
labour, and overhead costs, and excludes operating costs
such as selling, administrative, advertising or R&D, etc.
• Selling, General and Administrative expenses (SG&A or SGA) -
consist of the combined payroll costs. SGA is usually
understood as a major portion of non-production related
costs, in contrast to production costs such as direct labour.
• Depreciation / Amortization - the charge with respect to fixed
assets / intangible assets that have been capitalized on the
balance sheet for a specific accounting period. It is a
systematic and rational allocation of cost rather than the
recognition of market value decrement.
• Research & Development (R&D) expenses - represent
expenses included in research and development.
 Non-Operating Section
• Other revenues or gains - revenues and gains from other than
primary business activities (e.g., rent, income from patents,
goodwill). It also includes unusual gains that are either unusual
or infrequent, but not both (e.g., gain from sale of securities or
gain from disposal of fixed assets)
• Other expenses or losses - expenses or losses not related to
primary business operations, (e.g., foreign exchange loss).
• Finance costs - costs of borrowing from various creditors (e.g.,
interest expenses, bank charges).
• Income tax expense - sum of the amount of tax payable to
tax authorities in the current reporting period (current tax
liabilities/ tax payable) and the amount of deferred tax
liabilities (or assets).
 Earning per share

Because of its importance, earnings per share (EPS) are required

to be disclosed on the face of the income statement. A
company which reports any of the irregular items must also report
EPS for these items either in the statement or in the notes.
 Advantages of Income Statement
1. Provides detailed information on revenues: The income
statement provides detailed data on revenues. Besides the normal
costs such as the cost of goods sold (COGS), employee expenses,
operational expenses, it also accounts for additional costs like taxes
applicable. Similarly, on the revenue front, it accounts not only for
revenues earned from sales but also factors in for revenues gained
from non operational components like interest accrued by different
investments.
2. Database for Investor analysis: The income statement makes it easy
to see how financially healthy a company has been over a specific
time period. Certain key figures, such as the net income or earnings
per share, are directly stated on the document, which reduces the
amount of research required by the investor
3. It can be used as a tool for forecasting: The income
statement becomes the foundation for a forecast of future
accounting periods. These forecasts are used to generate
budgets for the company that may stretch out to 12 months,
5 years, or even 10 years, depending on what is being
evaluated. These statements are used to anticipate problems
that may creep up in the future, allowing the company to
develop a response plan to the situations that the income
statement indicates are possible.
4. It allows you to identify potential competitive advantages:
When you can review one income statement with another
from a competitive organization, it becomes possible to
identify potential competitive advantages where future
revenues could be generated. You may also be able to
identify where the competition is outperforming your
company, allowing you to shift resources to either become
more competitive or to look at different ways to be profitable
in other areas.
Disadvantages of Income Statement
1. Misrepresentation of data: The income statement includes
not only current revenues gained from sales but also the
money due from accounts receivable which the business has
not paid yet, just as it includes liabilities as expenses that have
not actually been paid yet. Also, the large one-time expenses
or revenues can drive the income sharply up or down from
what it actually should be.
2. It requires time to prepare and consume: Even if software can
instantly generate an income statement for you, it takes time
to prepare this statement. Figures must be implemented into
the software to generate the report in the first place. Receipts
may need to be scanned.Because each category is income-
separated, it also takes time to analyze the data on the
report to determine is accuracy and benefits.
3. It may not report true costs: When assets are held on a
balance sheet, then they depreciate over their useful life. The
Motley Fool uses the example of computer equipment being
depreciated by Microsoft. If $100 million in computer
equipment is purchased for Microsoft employees,
depreciated over 24 months, the income statement would
take a $50 million charge for the next two years. In reality,
that equipment is going to last longer than 24 months, which
means the depreciation expenses on the income statement
are not always a true reflection of the costs that are incurred.
 Requirement of IFRS

A business entity adopting IFRS must include:

•A statement of comprehensive income or
•Two separate statement comprising:
1.an income statement displaying components of profit or
loss and
2.a statement of comprehensive income that begins with profit
or loss and displays the items of other comprehensive income for
the reporting period.
 Items and Disclosures
1. Revenue
2. Finance costs (including interest expenses)
3. Share of the profit or loss of associates and joint ventures
accounted for using the equity method
4. Tax expense
5. A single amount comprising the total of (1) the post-tax profit or loss
of discontinued operations and (2) the post-tax gain or loss
recognized on the disposal of the assets or disposal group(s)
constituting the discontinued operation
6. Profit or loss
7. Each component of other comprehensive income classified by
nature
8. Share of the other comprehensive income of associates and joint
ventures accounted for using the equity method
9. Total comprehensive income
MADE BY- ADITYA KATARIA
ROLL NO- 18/2303
BMS 1ST YEAR