Income Statement

Introduction to Income Statement

mini-lectures: Income Statement 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:

  • Items that might be relevant but cannot be reliably measured are not reported (e.g. brand recognition and loyalty).
  • Some numbers depend on accounting methods used (e.g. using FIFO or LIFO accounting to measure inventory level).
  • Some numbers depend on judgments and estimates (e.g. depreciation expense depends on estimated useful life and salvage value).

The five key lines that make up an income statement are:

  • Sales or Revenue: The total amount of money taken in from selling the businessís products or services. You calculate this amount by totaling all the sales or revenue accounts. The top line of the income statement will be either sales or revenues; either is okay.
  • Cost of Goods Sold: How much was spent in order to buy or make the goods or services that were sold during the accounting period in review.
  • Gross Profit: How much a business made before taking into account operations expenses; calculated by subtracting the Cost of Goods Sold from the Sales or Revenue.
  • Operating Expenses: How much was spent on operating the business; qualifying expenses include administrative fees, salaries, advertising, utilities, and other operations expenses. You add all your expenses accounts on your income statement to get this total.
  • Net Income or Loss: Whether or not the business made a profit or loss during the accounting period in review; calculated by subtracting total expenses from Gross Profit.

Continue Reading »
Multimedia courses - "Creating a Profit and Loss Statement" »
Quizzes, word scrambles, crossword puzzles »

Go Top

Contact us

If you ’re after some specific information let us know, or if you are interested in supporting our work and would like to contribute, you are welcome to make a small donation. It will be a great help and will surely be appreciated.