Income statement

Income statement

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Income statement is a company's financial statement
Financial statement
A financial statement is a formal record of the financial activities of a business, person, or other entity. In British English—including United Kingdom company law—a financial statement is often referred to as an account, although the term financial statement is also used, particularly by...

 that indicates how the revenue
Revenue
In business, revenue is income that a company receives from its normal business activities, usually from the sale of goods and services to customers. In many countries, such as the United Kingdom, revenue is referred to as turnover....

 (money received from the sale of products and services before expenses are taken out, also known as the "top line") is transformed into the net income
Net income
Net income is the residual income of a firm after adding total revenue and gains and subtracting all expenses and losses for the reporting period. Net income can be distributed among holders of common stock as a dividend or held by the firm as an addition to retained earnings...

 (the result after all revenues and expenses have been accounted for, also known as the "bottom line"). It displays the revenues recognized for a specific
period, and the cost
Cost
In production, research, retail, and accounting, a cost is the value of money that has been used up to produce something, and hence is not available for use anymore. In business, the cost may be one of acquisition, in which case the amount of money expended to acquire it is counted as cost. In this...

 and expense
Expense
In common usage, an expense or expenditure is an outflow of money to another person or group to pay for an item or service, or for a category of costs. For a tenant, rent is an expense. For students or parents, tuition is an expense. Buying food, clothing, furniture or an automobile is often...

s charged against these revenues, including write-off
Write-off
The term write-off describes a reduction in recognized value. In accounting terminology, it refers to recognition of the reduced or zero value of an asset. In income tax statements, it refers to a reduction of taxable income as recognition of certain expenses required to produce the income...

s (e.g., depreciation
Depreciation
Depreciation refers to two very different but related concepts:# the decrease in value of assets , and# the allocation of the cost of assets to periods in which the assets are used ....

 and amortization
Amortization
Amortization is the process of decreasing, or accounting for, an amount over a period. The word comes from Middle English amortisen to kill, alienate in mortmain, from Anglo-French amorteser, alteration of amortir, from Vulgar Latin admortire to kill, from Latin ad- + mort-, mors death.When used...

 of various asset
Asset
In financial accounting, assets are economic resources. Anything tangible or intangible that is capable of being owned or controlled to produce value and that is held to have positive economic value is considered an asset...

s) and tax
Tax
To tax is to impose a financial charge or other levy upon a taxpayer by a state or the functional equivalent of a state such that failure to pay is punishable by law. Taxes are also imposed by many subnational entities...

es. The purpose of the income statement is to show managers
Management
Management in all business and organizational activities is the act of getting people together to accomplish desired goals and objectives using available resources efficiently and effectively...

 and investor
Investor
An investor is a party that makes an investment into one or more categories of assets --- equity, debt securities, real estate, currency, commodity, derivatives such as put and call options, etc...

s 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
Balance sheet
In financial accounting, a balance sheet or statement of financial position is a summary of the financial balances of a sole proprietorship, a business partnership or a company. Assets, liabilities and ownership equity are listed as of a specific date, such as the end of its financial year. A...

, 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 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
Gross profit
In accounting, gross profit or sales profit is the difference between revenue and the cost of making a product or providing a service, before deducting overhead, payroll, taxation, and interest payments...

. 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
    FIFO and LIFO accounting
    FIFO and LIFO Methods are accounting techniques used in managing inventory and financial matters involving the amount of money a company has tied up within inventory of produced goods, raw materials, parts, components, or feed stocks....

     to measure inventory level).
  • Some numbers depend on judgments and estimates (e.g. depreciation
    Depreciation
    Depreciation refers to two very different but related concepts:# the decrease in value of assets , and# the allocation of the cost of assets to periods in which the assets are used ....

     expense depends on estimated useful life and salvage value).

- INCOME STATEMENT GREENHARBOR LLC -
For the year ended DECEMBER 31 2010

€ €
Debit Credit
Revenues
GROSS REVENUES (including INTEREST income) 296,397
--------
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
--------
TOTAL EXPENSES (195,512)
--------
NET INCOME 100,885

Guidelines for statements of comprehensive income and income statements of business entities are formulated by the International Accounting Standards Board
International Accounting Standards Board
The International Accounting Standards Board is an independent, privately funded accounting standard-setter based in London, England.The IASB was founded on April 1, 2001 as the successor to the International Accounting Standards Committee...

 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
    Revenue
    In business, revenue is income that a company receives from its normal business activities, usually from the sale of goods and services to customers. In many countries, such as the United Kingdom, revenue is referred to as turnover....

     - 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 goods sold
      Cost of goods sold refers to the inventory costs of those goods a business has sold during a particular period. Costs are associated with particular goods using one of several formulas, including specific identification, first-in first-out , or average cost...

       (COGS) / Cost of Sales - represents the direct costs attributable to goods produced and sold by a business (manufacturing or merchandizing). It includes material costs, direct labour, and overhead costs (as in absorption costing), and excludes operating costs (period costs) such as selling, administrative, advertising or R&D, etc.
    • Selling, General and Administrative expenses (SG&A
      SG&A
      SG&A is an acronym used in accounting to refer to Selling, General and Administrative Expenses, which is a major non-production costs presented in an Income statement....

       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.
      • Selling expenses - represent expenses needed to sell products (e.g. salaries of sales people, commissions and travel expenses, advertising, freight, shipping, depreciation of sales store buildings and equipment, etc.).
      • General and Administrative (G&A) expenses - represent expenses to manage the business (salaries of officers / executives, legal and professional fees, utilities, insurance, depreciation of office building and equipment, office rents, office supplies, etc.).
    • Depreciation
      Depreciation
      Depreciation refers to two very different but related concepts:# the decrease in value of assets , and# the allocation of the cost of assets to periods in which the assets are used ....

       / Amortization
      Amortization
      Amortization is the process of decreasing, or accounting for, an amount over a period. The word comes from Middle English amortisen to kill, alienate in mortmain, from Anglo-French amorteser, alteration of amortir, from Vulgar Latin admortire to kill, from Latin ad- + mort-, mors death.When used...

       - the charge with respect to fixed assets / intangible assets that have been capitalised on the balance sheet
      Balance sheet
      In financial accounting, a balance sheet or statement of financial position is a summary of the financial balances of a sole proprietorship, a business partnership or a company. Assets, liabilities and ownership equity are listed as of a specific date, such as the end of its financial year. A...

       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.


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.). (IAS 1.99) 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. (IAS 1.104)
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 (e.g. rent, income from patents). 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 expense
    Interest expense
    Interest expense relates to the cost of borrowing money. It is the price that a lender charges a borrower for the use of the lender's money. Interest expense is different from OPEX and CAPEX, for it relates to the capital structure of a company. Interest expense is usually tax-deductible....

    s
    , bank charges).

  • Income tax expense - sum of the amount of tax
    Tax
    To tax is to impose a financial charge or other levy upon a taxpayer by a state or the functional equivalent of a state such that failure to pay is punishable by law. Taxes are also imposed by many subnational entities...

     payable to tax authorities in the current reporting period (current tax liabilities/ tax payable) and the amount of deferred tax
    Deferred tax
    Deferred tax is an accounting concept , meaning a future tax liability or asset, resulting from temporary differences or timing differences between the accounting value of assets and liabilities and their value for tax purposes.- Temporary differences :Temporary differences are differences between...

     liabilities (or assets).

Irregular items


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.
  • Discontinued operations is the most common type of irregular items. Shifting business location(s), stopping production temporarily, or changes due to technological improvement do not qualify as discontinued operations. Discontinued operations must be shown separately.


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
FIFO and LIFO accounting
FIFO and LIFO Methods are accounting techniques used in managing inventory and financial matters involving the amount of money a company has tied up within inventory of produced goods, raw materials, parts, components, or feed stocks....

 instead of weighted average method. The changes should be applied retrospectively and shown as adjustments to the beginning balance of affected components in Equity
Equity (finance)
In accounting and finance, equity is the residual claim or interest of the most junior class of investors in assets, after all liabilities are paid. If liability exceeds assets, negative equity exists...

. All comparative financial statements should be restated. (IAS 8)

However, changes in estimates (e.g. estimated useful life of a fixed asset) only requires prospective changes. (IAS 8)

No items may be presented in the income statement as extraordinary items. (IAS 1.87) Extraordinary items are both unusual (abnormal) and infrequent, for example, unexpected natural disaster, expropriation, prohibitions under new regulations. [Note: natural disaster might not qualify depending on location (e.g. frost damage would not qualify in Canada but would in the tropics).]

Additional items may be needed to fairly present the entity's results of operations. (IAS 1.85)

Disclosures


Certain items must be disclosed separately in the notes (or the statement of comprehensive income), if material, including: (IAS 1.98)
  • 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


Because of its importance, earnings per share
Earnings per share
Earnings per share is the amount of earnings per each outstanding share of a company's stock.In the United States, the Financial Accounting Standards Board requires companies' income statements to report EPS for each of the major categories of the income statement: continuing operations,...

 (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.



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


The following income statement is a very brief example prepared in accordance with IFRS. It does not show all possible kinds of items appeared a firm, but it shows the most usual ones. Please note the difference between IFRS and US GAAP when interpreting the following sample income statements.

Fitness Equipment Limited
INCOME STATEMENTS
(in millions)

Year Ended March 31, 2009 2008 2007
----------------------------------------------------------------------------------
Revenue $ 14,580.2 $ 11,900.4 $ 8,290.3
Cost of sales (6,740.2) (5,650.1) (4,524.2)
------------- ------------ ------------
Gross profit 7,840.0 6,250.3 3,766.1
------------- ------------ ------------

SGA expenses (3,624.6) (3,296.3) (3,034.0)
------------- ------------ ------------
Operating profit $ 4,215.4 $ 2,954.0 $ 732.1
------------- ------------ ------------

Gains from disposal of fixed assets 46.3 - -
Interest expense (119.7) (124.1) (142.8)
------------- ------------ ------------
Profit before tax 4,142.0 2,829.9 589.3
------------- ------------ ------------

Income tax expense (1,656.8) (1,132.0) (235.7)
------------- ------------ ------------
Profit (or loss) for the year $ 2,485.2 $ 1,697.9 $ 353.6

DEXTERITY INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In millions)

Year Ended December 31, 2009 2008 2007
----------------------------------------------------------------------------------------------
Revenue
Revenue
In business, revenue is income that a company receives from its normal business activities, usually from the sale of goods and services to customers. In many countries, such as the United Kingdom, revenue is referred to as turnover....

  $ 36,525.9 $ 29,827.6 $ 21,186.8
Cost of sales  (18,545.8) (15,858.8) (11,745.5)
----------- ----------- ------------
Gross profit
Gross profit
In accounting, gross profit or sales profit is the difference between revenue and the cost of making a product or providing a service, before deducting overhead, payroll, taxation, and interest payments...

  17,980.1 13,968.8 9,441.3

----------- ----------- ------------

Operating expenses:
Selling, general and administrative expenses
SG&A
SG&A is an acronym used in accounting to refer to Selling, General and Administrative Expenses, which is a major non-production costs presented in an Income statement....

  (4,142.1) (3,732.3) (3,498.6)
Depreciation
Depreciation
Depreciation refers to two very different but related concepts:# the decrease in value of assets , and# the allocation of the cost of assets to periods in which the assets are used ....

  (602.4) (584.5) (562.3)
Amortization
Amortization
Amortization is the process of decreasing, or accounting for, an amount over a period. The word comes from Middle English amortisen to kill, alienate in mortmain, from Anglo-French amorteser, alteration of amortir, from Vulgar Latin admortire to kill, from Latin ad- + mort-, mors death.When used...

  (209.9) (141.9) (111.8)
Impairment loss (17,997.1) — —
----------- ----------- ------------
Total operating expenses (22,951.5) (4,458.7) (4,172.7)
----------- ----------- ------------
Operating profit (or loss) $ (4,971.4) $ 9,510.1 $ 5,268.6
----------- ----------- ------------

Interest income 25.3 11.7 12.0
Interest expense (718.9) (742.9) (799.1)
----------- ----------- ------------
Profit (or loss) from continuing operations
before tax, share of profit (or loss) from
associates and non-controlling interest $ (5,665.0) $ 8,778.9 $ 4,481.5
----------- ----------- ------------

Income tax
Tax
To tax is to impose a financial charge or other levy upon a taxpayer by a state or the functional equivalent of a state such that failure to pay is punishable by law. Taxes are also imposed by many subnational entities...

 expense (1,678.6) (3,510.5) (1,789.9)
Profit (or loss) from associates
Associate company
An associate company in accounting and business valuation is a company in which another company owns a significant portion of voting shares, usually 20–50%. In this case, an owner does not consolidate the associate's financial statements. Ownership of over 50% creates a subsidiary, with its...

, net of tax (20.8) 0.1 (37.3)
Profit (or loss) from non-controlling interest,
net of tax (5.1) (4.7) (3.3)
----------- ----------- ------------
Profit (or loss) from continuing operations $ (7,348.7) $ 5,263.8 $ 2,651.0
----------- ----------- ------------

Profit (or loss) from discontinued operations,
net of tax (1,090.3) (802.4) 164.6
----------- ----------- ------------
Profit (or loss) for the year $ (8,439.0] $ 4,461.4 $ 2,815.6

Bottom line


"Bottom line" is the net income
Net income
Net income is the residual income of a firm after adding total revenue and gains and subtracting all expenses and losses for the reporting period. Net income can be distributed among holders of common stock as a dividend or held by the firm as an addition to retained earnings...

 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 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
International Accounting Standards Board
The International Accounting Standards Board is an independent, privately funded accounting standard-setter based in London, England.The IASB was founded on April 1, 2001 as the successor to the International Accounting Standards Committee...

 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:
  1. an Income Statement displaying components of profit or loss and
  2. a Statement of Comprehensive Income that begins with profit or loss (bottom line of the income statement) and displays the items of other comprehensive income for the reporting period. (IAS1.81)


All non-owner changes in equity (i.e. comprehensive income ) shall be presented in either in the statement of comprehensive income (or in a separate income statement and a statement of comprehensive income). Components of comprehensive income may not be presented in the statement of changes in equity.

Comprehensive income
Comprehensive income
Comprehensive income is a specific term used in companies' financial reporting from the company-whole point of view. Because that use excludes the effects of changing ownership interest, an economic measure of comprehensive income is necessary for financial analysis from the shareholders' point...

for a period includes profit or loss (net income) 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. (IAS 1.88) Some IFRSs require or permit that some components to be excluded from profit or loss and instead to be included in other comprehensive income. (IAS 1.89)

Items and disclosures


The statement of comprehensive income should include: (IAS 1.82)
  1. Revenue
    Revenue
    In business, revenue is income that a company receives from its normal business activities, usually from the sale of goods and services to customers. In many countries, such as the United Kingdom, revenue is referred to as turnover....

  2. Finance costs (including interest expense
    Interest expense
    Interest expense relates to the cost of borrowing money. It is the price that a lender charges a borrower for the use of the lender's money. Interest expense is different from OPEX and CAPEX, for it relates to the capital structure of a company. Interest expense is usually tax-deductible....

    s)
  3. Share of the profit or loss of associates
    Associate company
    An associate company in accounting and business valuation is a company in which another company owns a significant portion of voting shares, usually 20–50%. In this case, an owner does not consolidate the associate's financial statements. Ownership of over 50% creates a subsidiary, with its...

     and joint ventures accounted for using the equity method
    Equity method
    Equity method in accounting is the process of treating equity investments, usually 20–50%, in associate companies. The investor keeps such equities as an asset. The investor's proportional share of the associate company's net income increases the investment , and proportional payment of dividends...

  4. Tax
    Tax
    To tax is to impose a financial charge or other levy upon a taxpayer by a state or the functional equivalent of a state such that failure to pay is punishable by law. Taxes are also imposed by many subnational entities...

     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 recognised 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


The following items must also be disclosed in the statement of comprehensive income as allocations for the period: (IAS 1.83)
  • Profit or loss for the period attributable to non-controlling interests and owners of the parent
    Parent company
    A parent company is a company that owns enough voting stock in another firm to control management and operations by influencing or electing its board of directors; the second company being deemed as a subsidiary of the parent company...

  • Total comprehensive income attributable to non-controlling interests and owners of the parent


No items may be presented in the statement of comprehensive income (or in the income statement, if separately presented) or in the notes as extraordinary items.

See also


  • Comprehensive income
    Comprehensive income
    Comprehensive income is a specific term used in companies' financial reporting from the company-whole point of view. Because that use excludes the effects of changing ownership interest, an economic measure of comprehensive income is necessary for financial analysis from the shareholders' point...

  • Cash flow
    Cash flow
    Cash flow is the movement of money into or out of a business, project, or financial product. It is usually measured during a specified, finite period of time. Measurement of cash flow can be used for calculating other parameters that give information on a company's value and situation.Cash flow...

  • Cash flow statement
    Cash flow statement
    In financial accounting, a cash flow statement, also known as statement of cash flows or funds flow statement, is a financial statement that shows how changes in balance sheet accounts and income affect cash and cash equivalents, and breaks the analysis down to operating, investing, and financing...

  • Balance sheet
    Balance sheet
    In financial accounting, a balance sheet or statement of financial position is a summary of the financial balances of a sole proprietorship, a business partnership or a company. Assets, liabilities and ownership equity are listed as of a specific date, such as the end of its financial year. A...


  • Statement of retained earnings
    Statement of retained earnings
    The Statement of Retained Earnings are basic financial statements.The statements explain the changes in a company's retained earnings over the reporting...

     (statement of changes in equity)
  • Model audit
    Model Audit
    A model audit is the colloquial term for the tasks performed when conducting due diligence on a financial model, in order to eliminate spreadsheet error. . A study in 1998 concluded that even MBA students with over 250 hours of spreadsheet development experience had a 24% chance of introducing...

  • International Financial Reporting Standards
    International Financial Reporting Standards
    International Financial Reporting Standards are principles-based standards, interpretations and the framework adopted by the International Accounting Standards Board ....

     (and its requirements
    Requirements of IFRS
    This article lists some of the important requirements of International Financial Reporting Standards.References to IFRS standards are given in the standard convention, for example refers to paragraph 10 of IAS1, Presentation of Financial Statements.....

    )
  • PnL Explained
    PnL Explained
    PnL Explained also called P&L Explain, P&L Attribution or Profit and Loss Explained is a type of report commonly used by traders, especially derivatives traders, that attributes or explains the daily fluctuation in the value of a portfolio of trades to the root causes of the changes.P&L is the...

    - Profit and loss explained report


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