|Introduction to Income Statement|
|Types of accounts used to prepare the Income Statement|
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The Income Statement is a formal financial statement that summarizes a company's operations (revenues and expenses) for a specific period of time usually a month or year.
It displays the revenues recognized for a specific period, and the cost and expenses charged against these revenues, including write-offs(e.g., depreciation and amortization of various assets ) and taxes.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 important thing to remember about an income statement is that it represents a period of time. This contrasts with the balance sheet, which represents a single moment in time.
A fiscal year is the period used for calculating annual (yearly) financial statements. While a large number of businesses use the calendar year as their fiscal year, a business can elect to use any other twelve month period such as June-May as their fiscal year.
The income statement can be prepared in one of two methods.The Single Step income statement takes a simpler approach, totaling revenues and subtracting 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, starting with the gross profit. It then calculates operating expenses and, 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 should help investors and creditors determine the past financial performance of the enterprise, predict future performance, and assess the capability of generating future cash flows through report of the income and expenses.
However, information of an income statement has several limitations:
The following types of accounts are used to prepare the Income Statement.
Expenses recognised in the income statement should be analysed either by nature (raw materials, transport costs, staffing costs, depreciation, employee benefit etc.) or by function (cost of sales, selling, administrative, etc.). If an entity categorises by function, then additional information on the nature of expenses, at least, – depreciation, amortisation and employee benefits expense – must be disclosed. 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.
They are reported separately because this way users can better predict future cash flows - irregular items most likely will not recur. These are reported net of taxes.
Cumulative effect of changes in accounting policies (principles) is the difference between the book value of the affected assets (or liabilities) under the old policy (principle) and what the book value would have been if the new principle had been applied in the prior periods. For example, valuation of inventories using LIFO instead of weighted average method. The changes should be applied retrospectively and shown as adjustments to the beginning balance of affected components in Equity. All comparative financial statements should be restated.
However, changes in estimates (e.g. estimated useful life of a fixed asset) only requires prospective changes.
Certain items must be disclosed separately in the notes (or the statement of comprehensive income), if material, including:
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.