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 money or lost money during the period being reported.
An income statement represents a period of time. This contrasts with the balance sheet, which represents a single moment in time.
Charitable organizations that are required to publish financial statements do not produce an income statement. Instead, they produce a similar statement that reflects funding sources compared against program expenses, administrative costs, and other operating commitments. This statement is commonly referred to as the statement of activities. Revenues and expenses are further categorized in the statement of activities by the donor restrictions on the funds received and expended.
The income statement can be prepared in one of two methods. The Single Step income statement totals revenues and subtracts expenses to find the bottom line. 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.
Usefulness and limitations of income statement
Income statements may help investors and creditors determine the past financial performance of the enterprise, predict the future performance, and assess the capability of generating future cash flows using the report of income and expenses.However, information of an income statement has several limitations:
- Items that might be relevant but cannot be reliably measured are not reported.
- Some numbers depend on accounting methods used.
- Some numbers depend on judgments and estimates.
For the year ended DECEMBER 31 2010
€ €
Debit Credit
Revenues
GROSS REVENUES 296,397
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Expenses:
ADVERTISING 6,300
BANK & CREDIT CARD FEES 144
BOOKKEEPING 2,350
SUBCONTRACTORS 88,000
ENTERTAINMENT 5,550
INSURANCE 750
LEGAL & PROFESSIONAL SERVICES 1,575
LICENSES 632
PRINTING, POSTAGE & STATIONERY 320
RENT 13,000
MATERIALS 74,400
TELEPHONE 1,000
UTILITIES 1,491
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TOTAL EXPENSES
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NET INCOME 100,885
Guidelines for statements of comprehensive income and income statements of business entities are formulated by the International Accounting Standards Board and numerous country-specific organizations, for example the FASB in the U.S..
Names and usage of different accounts in the income statement depend on the type of organization, industry practices and the requirements of different jurisdictions.
If applicable to the business, summary values for the following items should be included in the 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 / Cost of Sales - represents the direct costs attributable to goods produced and sold by a business. 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 - 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.
- ** Selling expenses - represent expenses needed to sell products.
- ** General and Administrative expenses - represent expenses to manage the business.
- * Depreciation / Amortization - the charge with respect to fixed assets / intangible assets that have been capitalised on the balance sheet for a specific period. It is a systematic and rational allocation of cost rather than the recognition of market value decrement.
- * Research & Development expenses - represent expenses included in research and development.
The major exclusive of costs of goods sold, are classified as operating expenses. These represent the resources expended, except for inventory purchases, in generating the revenue for the period. Expenses often are divided into two broad sub classicifications selling expenses and administrative expenses.
Non-operating section
- Other revenues or gains - revenues and gains from other than primary business activities. It also includes unusual gains that are either unusual or infrequent, but not both
- Other expenses or losses - expenses or losses not related to primary business operations,.
- Finance costs - costs of borrowing from various creditors.
- Income tax expense - sum of the amount of tax payable to tax authorities in the current reporting period and the amount of deferred tax liabilities.
Irregular items
- Discontinued operations is the most common type of irregular items. Shifting business location, stopping production temporarily, or changes due to technological improvement do not qualify as discontinued operations. Discontinued operations must be shown separately.
However, changes in estimates only requires prospective changes.
No items may be presented in the income statement as extraordinary items under IFRS regulations, but are permissible under US GAAP. Extraordinary items are both unusual and infrequent, for example, unexpected natural disaster, expropriation, prohibitions under new regulations.
Additional items may be needed to fairly present the entity's results of operations.
Disclosures
Certain items must be disclosed separately in the notes, if material, including:- Write-downs of inventories to net realisable value or of property, plant and equipment to recoverable amount, as well as reversals of such write-downs
- Restructurings of the activities of an entity and reversals of any provisions for the costs of restructuring
- Disposals of items of property, plant and equipment
- Disposals of investments
- Discontinued operations
- Litigation settlements
- Other reversals of provisions
Earnings per share
There are two forms of EPS reported:
- Basic: in this case “weighted average of shares outstanding” includes only actual stocks outstanding.
- Diluted: in this case “weighted average of shares outstanding” is calculated as if all stock options, warrants, convertible bonds, and other securities that could be transformed into shares are transformed. This increases the number of shares and so EPS decreases. Diluted EPS is considered to be a more reliable way to measure EPS.
Sample income statement
Bottom line
“Bottom line” is the net income that is calculated after subtracting the expenses from revenue. Since this forms the last line of the income statement, it is informally called “bottom line.” It is important to investors as it represents the profit for the year attributable to the shareholders.After revision to IAS 1 in 2003, the Standard is now using profit or loss for the year rather than net profit or loss or net income as the descriptive term for the bottom line of the income statement.
Requirements of IFRS
On 6 September 2007, the International Accounting Standards Board issued a revised IAS 1: Presentation of Financial Statements, which is effective for annual periods beginning on or after 1 January 2009.A business entity adopting IFRS must include:
- a statement of comprehensive income or
- two separate statements comprising:
Comprehensive income for a period includes profit or loss for that period and other comprehensive income recognised in that period.
All items of income and expense recognised in a period must be included in profit or loss unless a Standard or an Interpretation requires otherwise. Some IFRSs require or permit that some components to be excluded from profit or loss and instead to be included in other comprehensive income.
Items and disclosures
The statement of comprehensive income should include:- Revenue
- Finance costs
- Share of the profit or loss of associates and joint ventures accounted for using the equity method
- Tax expense
- A single amount comprising the total of the post-tax profit or loss of discontinued operations and the post-tax gain or loss recognised on the disposal of the assets or disposal group constituting the discontinued operation
- Profit or loss
- Each component of other comprehensive income classified by nature
- Share of the other comprehensive income of associates and joint ventures accounted for using the equity method
- Total comprehensive income
- Profit or loss for the period attributable to non-controlling interests and owners of the parent
- Total comprehensive income attributable to non-controlling interests and owners of the parent