Income statement

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A financial statement that measures a company's financial performance over a specific accounting period. Financial performance is assessed by giving a summary of how the business incurred its revenues and expenses - due to both operating and non-operating activities. It also shows the net profit or loss incurred over a specific accounting period, typically over a fiscal quarter or year.

Also known as the "profit and loss statement" or "statement of revenue and expense".

Investopedia Says:
The income statement is the one of the three major financial statements, the other two being the balance sheet and the statement of cash flows. The income statement is divided into two parts: the operating and non-operating sections.

The portion of the income statement that deals with operating items is interesting to investors and analysts alike, because this section discloses information about revenues and expenses that are a direct result of the regular business operations. For example, if a business creates sports equipment, then the operating items section would talk about the revenues and expenses involved with the production of sports equipment.

The non-operating items section discloses revenue and expense information about activities that are not tied directly to a company's regular operations. For example, if the sport equipment company sold a factory and some old plant equipment, then this information would be in the non-operating items section.

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A historical financial report that indicates sources and amounts of revenues, amounts of expense accounts, and profit or loss. Generally prepared on either an accrual or a cash basis. Contrast Pro-Forma Statement.
Example: Table 27.

Table 27 Year 2000 P&l

Rental income actually collected $96,000

Concession income 5,000

Late fees xx1,000

Total revenues $102,000

Interest expense 42,000

Repairs and maintenance 12,000

Depreciation expense xx7,000

Total expenses xx61,000

Profit (loss) $41,000

Form showing the elements used in arriving at a company's Net Income for the accounting period; also called profit and loss statement. It must be included in the annual report. An illustrative condensed income statement follows:

Sales

Less: Cost of sales

Gross Margin

Less: Operating expenses (including selling expenses and general & administrative expenses)

Income from operations

Add or Less: Other income and expenses

Income before tax

Less: Provision for income taxes

Income from continuing operations

Add or Less: Income from discontinued operations (net of tax)

Income before extraordinary items and cumulative effect

Add or Less: Extraordinary items (net of tax)

Add or Less: Cumulative effect of a change in accounting principle (net of tax)

Net income

An income statement presents the results of a company's operations for a given reporting period. Along with the balance sheet, the statement of cash flows, and the statement of changes in owners' equity, the income statement is one of the primary means of financial reporting. It is prepared by accountants in accordance with accepted principles. The income statement presents the revenues and expenses incurred by an entity during a specific time period, culminating in a figure known as net income. A company's net income for an accounting period is measured as follows: Net income Revenues Expenses Gains Losses.

The income statement provides information concerning return on investment, risk, financial flexibility, and operating capabilities. Return on investment is a measure of a firm's overall performance. Risk is the uncertainty associated with the future of the enterprise. Financial flexibility is the firm's ability to adapt to problems and opportunities. Operating capability relates to the firm's ability to maintain a given level of operations.

The current view of the income statement is that income should reflect all items of profit and loss recognized during the accounting period, except for a few items that would be entered directly under retained earnings on the balance sheet, notably prior period adjustments (i.e., correction of errors). The main area of transaction that is not included in the income statement involves changes in the equity of owners. The following summary income statement illustrates the format under generally accepted accounting principles:

Terms on the Income Statement

The Financial Accounting Standards Board provides broad definitions of revenues, expenses, gains, losses, and other terms that appear on the income statement in its Statement of Concepts No. 6. Revenues are inflows or other enhancements of assets of an entity or settlement of its liabilities (or both) during a period, based on production and delivery of goods, provisions of services, and other activities that constitute the entity's major operations. Examples of revenues are sales revenue, interest revenue, and rent revenue.

Expenses are outflows or other uses of assets or incurrence of liabilities (or both) during a period as a result of delivering or producing goods, rendering services, or carrying out other activities that constitute the entity's ongoing major or central operations. Examples are cost of goods sold, salaries expense, and interest expense.

Gains are increases in owners' equity (net assets) from peripheral or incidental transactions of an entity and from all other transactions and events affecting the entity during the accounting period, except those that result from revenues or investments by owners. Examples are a gain on the sale of a building and a gain on the early retirement of long-term debt.

Losses are decreases in owners' equity (net assets) from peripheral or incidental transactions of an entity and from all other transactions and events affecting the entity during the accounting period except those that result from expenses or distributions to owners. Examples are losses on the sale of investments and losses from litigations.

Discontinued operations are those operations of an enterprise that have been sold, abandoned, or otherwise disposed. The results of continuing operations must be reported separately in the income statement from discontinued operations, and any gain or loss from the disposal of a segment must be reported along with the operating results of the discontinued separate major line of business or class of customer. Results from discontinued operations are reported net of income taxes.

Extraordinary gains or losses are material events and transactions that are both unusual in nature and infrequent in occurrence. Both of these criteria must be met for an item to be classified as an extraordinary gain or loss. To be considered unusual in nature, the underlying event or transaction should possess a high degree of abnormality and be clearly unrelated to, or only incidentally related to, the ordinary and typical activities of the entity, taking into account the environment in which the entity operates. To be considered infrequent in occurrence, the underlying event or transaction should be of a type that would not reasonably be expected to recur in the foreseeable future, taking into account the environment in which the entity operates.

Extraordinary items could result if gains or losses were the direct result of any of the following events or circumstances: 1) a major casualty, such as an earthquake, 2) an expropriation of property by a foreign government, or 3) a prohibition under a new act or regulation. Extraordinary items are reported net of income taxes.

Gains and losses that are not extraordinary refer to material items which are unusual or infrequent, but not both. Such items must be disclosed separately and would be not be reported net of tax.

An accounting change refers to a change in accounting principle, accounting estimate, or reporting entity. Changes in accounting principles result when an accounting principle is adopted that is different from the one previously used. Changes in estimate involve revisions of estimates, such as the useful lives or residual value of depreciable assets, the loss for bad debts, and warranty costs. A change in reporting entity occurs when a company changes its composition from the prior period, as occurs when a new subsidiary is acquired.

Net income is the excess of all revenues and gains for a period over all expenses and losses of the period. Net loss is the excess of expenses and losses over revenues and gains for a period.

Generally accepted accounting principles require disclosing earnings per share amounts on the income statement of all public reporting entities. Earnings per share data provides a measure of the enterprise's management and past performance and enables users of financial statements to evaluate future prospects of the enterprise and assess dividend distributions to shareholders. Disclosure of earnings per share for effects of discontinued operations and extraordinary items is optional, but it is required for income from continuing operations, income before extraordinary items, cumulative effects of a change in accounting principles, and net income.

Primary earnings per share and fully diluted earnings per share may also be required. Primary earnings per share is a presentation based on the outstanding common shares and those securities that are in substance equivalent to common shares and have a diluting effect on earnings per share. Convertible bonds, convertible preferred stock, stock options, and warrants are examples of common stock equivalents. The fully diluted earnings per share presentation is a pro forma presentation that shows the dilution of earnings per share that would have occurred if all contingent issuances of common stock that would individually reduce earnings per share had taken place at the beginning of the period.

Principles for Recognizing Revenues and Expenses

The revenue recognition principle provides guidelines for reporting revenue in the income statement. The principle generally requires that revenue be recognized in the financial statements when: 1) realized or realizable, and 2) earned. Revenues are realized when products or other assets are exchanged for cash or claims to cash or when services are rendered. Revenues are realizable when assets received or held are readily convertible into cash or claims to cash. Revenues are considered earned when the entity has substantially accomplished what it must do to be entitled to the benefits represented by the revenues. Recognition through sales or the providing (performance) of services provides a uniform and reasonable test of realization. Limited exceptions to the basic revenue principle include recognizing revenue during production (on long-term construction contracts), at the completion of production (for many commodities), and subsequent to the sale at the time of cash collection (on installment sales).

In recognizing expenses, accountants rely on the matching principle because it requires that efforts (expenses) be matched with accomplishments (revenues) whenever it is reasonable and practical to do so. For example, matching (associating) cost of goods sold with revenues from the interrelated sales that resulted directly and jointly from the same transaction as the expense is reasonable and practical. To recognize costs for which it is difficult to adopt some association with revenues, accountants use a rational and systematic allocation policy that assigns expenses to the periods during which the related assets are expected to provide benefits, such as depreciation, amortization, and insurance. Some costs are charged to the current period as expenses (or losses) merely because no future benefit is anticipated, no connection with revenue is apparent, or no allocation is rational and systematic under the circumstances, i.e., an immediate recognition principle.

The current operating concept of income would include only those value changes and events that are controllable by management and that are incurred in the current period from ordinary, normal, and recurring operations. Any unusual and nonrecurring items of income or loss would be recognized directly in the statement of retained earnings. Under this concept, investors are primarily interested in continuing income from operations.

The all-inclusive concept of income includes the total changes in equity recognized during a specific period, except for dividend distributions and capital transactions. Under this concept, unusual and nonrecurring income or loss items are part of the earning history of a company and should not be overlooked. Currently, the all-inclusive concept is generally recognized; however, certain material prior period adjustments should be reflected adjustments of the opening retained earnings balance.

Formats of the Income Statement

The income statement can be prepared using either the single-step or the multiple-step format. The single-step format lists and totals all revenue and gain items at the beginning of the statement. All expense and loss items are then fixed and the total is deducted from the total revenue to give the net income. The multiple-step income statement presents operating revenue at the beginning of the statement and nonoperating gains, expenses, and losses near the end of the statement. However, various items of expenses are deducted throughout the statement at intermediate levels. The statement is arranged to show explicitly several important amounts, such as gross margin on sales, operating income, income before taxes, and net income. Extraordinary items, gains and losses, accounting changes, and discontinued operations are always shown separately at the bottom of the income statement ahead of net income, regardless of which format is used.

Each format of the income statement has its advantages. The advantage of the multiple-step income statement is that it explicitly displays important financial and managerial information that the user would have to calculate from a single-step income statement. The single-step format has the advantage of being relatively simple to prepare and to understand.

Further Reading:

Horngren, Charles T., and Gary L. Sundem. Introduction to Financial Accounting. 4th ed. Englewood Cliffs, NJ: Prentice Hall, 1990.

Orr, Jayson. "Making Your Numbers Talk: The Income Statement." CMA Management. November 2000.

Welsch, Glen A., Robert N. Anthony, and Daniel G. Short. Fundamentals of Financial Accounting. 4th ed. Homewood, IL: Irwin, 1984.

See also: Annual Report; Balance Sheet; Financial Statement

This article includes a list of references, related reading or external links, but its sources remain unclear because it lacks inline citations. Please improve this article by introducing more precise citations where appropriate. (February 2008)

The examples and perspective in this article may not represent a worldwide view of the subject. Please improve this article and discuss the issue on the talk page.

Accountancy
Key concepts
Accountant Bookkeeping Trial balance General ledger Debits and credits Cost of goods sold Double-entry system Standard practices Cash and accrual basis GAAP / IFRS
Financial statements
Balance sheet Income statement Cash flow statement Equity Retained earnings
Auditing
Financial audit GAAS Internal audit Sarbanes-Oxley Act Big Four auditors
Fields of accounting
Cost • Financial • Forensic Fund • Management • Tax
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Income statement, also referred as profit and loss statement (P&L), earnings statement, operating statement or statement of operations,^[1] is a company's financial statement that indicates how the revenue (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 (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 and expenses charged against these revenues, including write-offs (e.g., depreciation and amortization of various assets) and taxes.^[1] 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.

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 statements of activities [1]. 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.^[2] 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.

Contents 1 Usefulness and limitations of income statement 2 Items on income statement 2.1 Operating section 2.2 Non-operating section 2.3 Irregular items 2.4 Earnings per share 3 Bottom line 4 See also 5 Notes 6 References 7 External links

Usefulness and limitations of income statement

Income statements should help investors and creditors determine the past performance of the enterprise, predict future performance, and assess the capability of generating future cash flows.

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).

See also: Creative accounting

                - INCOME STATEMENT BOND LLC -
             For the year ended DECEMBER 31 2007

                                               $         $
Revenues
GROSS PROFIT (including rental income)                496,397
                                                      --------
Expenses: 
  ADVERTISING                                6,300
  BANK & CREDIT CARD FEES                      144
  BOOKKEEPING                                3,350
  EMPLOYEES                                 88,000
  ENTERTAINMENT                              5,550
  INSURANCE                                    750
  LEGAL & PROFESSIONAL SERVICES              1,575
  LICENSES                                     632
  PRINTING, POSTAGE & STATIONERY               320
  RENT                                      13,000
  RENTAL MORTGAGES AND FEES                 74,400
  UTILITIES                                    491
                                                       --------
      TOTAL EXPENSES                                   (194,512)
                                                       --------
NET INCOME                                              301,885
                                                       ========

Items on 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. Usually presented as sales minus sales discounts, returns, and allowances.
• 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.
  • General and administrative expenses (G & A) - represent expenses to manage the business (officer salaries, legal and professional fees, utilities, insurance, depreciation of office building and equipment, office rents, office supplies)
  • Selling expenses - represent expenses needed to sell products (e.g., sales salaries, commissions and travel expenses, advertising, freight, shipping, depreciation of sales store buildings and equipment)
  • Selling General and Administrative expenses (SG&A or SGA) - consist of the combined payroll costs (salaries, commissions, and travel expenses of executives, sales people and employees), and advertising expenses a company incurs. SGA is usually understood as a major portion of non-production related costs, opposing production related costs such as raw material and (direct) labour
  • R & D expenses - represent expenses included in research and development
  • Depreciation - is the charge for a specific period (i.e. year, accounting period) with respect to fixed assets that have been capitalised on the balance sheet.

Non-operating section

• Other revenues or gains - revenues and gains from other than primary business activities (e.g. rent, patents). It also includes unusual gains and losses that are either unusual or infrequent, but not both (e.g. sale of securities or fixed assets)
• Other expenses or losses - expenses or losses not related to primary business operations.

Irregular items

They are reported separately because this way users can better predict future cash flows - irregular items most likely won't happen next year. These are reported net of taxes.

• 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.
• 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).
• Changes in accounting principle is, for example, deciding to depreciate an investment property that has previously not been depreciated. However, changes in estimates (e.g. estimated useful life of a fixed asset) do not qualify.

Earnings 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.

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.

                                     24/7
                             Family Fitness and Fun
  
                              STATEMENTS OF INCOME
                
         
 Revenues                             $12,580.2    $  10,900.4     $  8,290.3 
 Cost of sales                          6,740.2       5,650.1        4,524.2 
------------------------------------------------------------------------------
    Gross profit                        6,835.0       5,657.3        3,270.1 
 Selling, general and administrative 
  expenses                              3,624.6       3,296.3        3,034.0 
 Other (income) expense, net            1,100.3         (20.0)          18.0      
------------------------------------------------------------------------------
    Operating profit                    2,122.1       2,166.0        2,013.1 
 Interest expense, net                    119.7         124.1          142.8 
------------------------------------------------------------------------------
    Income before income taxes          2,102.4       1,980.9        1,870.3 
 Provision for income taxes               680.3         620.6          582.0 
------------------------------------------------------------------------------
    Net income                        $ 1,720.1    $  1,421.3     $  1,190.3 
------------------------------------------------------------------------------

                                VIACOM INC. AND SUBSIDIARIES 
                            CONSOLIDATED STATEMENTS OF OPERATIONS
                                       (In millions)	
----------------------------------------------------------------------------------------------
  Year Ended December 31,                                   2004         2003         2002
----------------------------------------------------------------------------------------------
 Revenues                                               $ 22,525.9   $ 20,827.6   $19,186.8   
 Expenses:                      
    Operating                                             12,545.8     11,879.8    10,735.5   
    Selling, general and administrative                    4,142.1      3,732.3     3,498.6   
    Depreciation and amortization                            809.9        741.9       711.8   
    Impairment charge (Note 3)                            17,997.1            —            —   
----------------------------------------------------------------------------------------------
      Total expenses                                      35,494.9     16,354.0    14,945.9   
----------------------------------------------------------------------------------------------
 Operating income (loss)                                 (12,969.0)     4,473.6      4,240.9 
 Interest expense                                           (718.9)      (742.9)      (799.1) 
 Interest income                                              25.3         11.7        12.0   
 Other items, net                                              7.6         (3.0)       (32.9) 
----------------------------------------------------------------------------------------------
 Earnings (loss) from continuing operations before 
  income taxes, equity in earnings (loss) of affiliated 
  companies and minority interest                        (13,655.0)     3,739.4     3,420.9   
 Provision for income taxes                               (1,378.6)    (1,497.0)    (1,338.3) 
 Equity in earnings (loss) of affiliated companies, 
  net of tax                                                 (20.8)          .1        (37.3) 
 Minority interest, net of tax                                (5.1)        (4.7)        (3.3) 
----------------------------------------------------------------------------------------------
 Net Income (loss) from continuing operations          (15,059.5)     2,237.8      2,042.0  
----------------------------------------------------------------------------------------------
 Discontinued operations (Note 2):                     
    Earnings (loss) from discontinued operations          (1,182.7)      (718.8)      255.3   
    Income taxes, net of minority interest                    92.4        (83.6)       (90.7)
----------------------------------------------------------------------------------------------
    Net Income (loss) from discontinued operations      (1,090.3)      (802.4)       164.6  
----------------------------------------------------------------------------------------------
 Net Income (loss) before cumulative effect of 
  accounting change                                      (16,149.8)     1,435.4     2,206.6   
 Cumulative effect of accounting change, net of minority 
  interest and tax (Note 1)                               (1,312.4)       (18.5)    (1,480.9)
----------------------------------------------------------------------------------------------
 Net Income (loss)                                   $ (17,462.2)   $ 1,416.9   $   725.7   
----------------------------------------------------------------------------------------------
                                       
                                        Fig I-3

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.

See also

• Comprehensive income
• Accounting
• Cash flow
• Balance Sheet
• Model Audit

Notes

1. ^ ^{a b} Helfert, Erich A. (2001). "The Nature of Financial Statements: The Income Statement". Financial Analysis - Tools and Techniques - A Guide for Managers. McGraw-Hill. p. 40. doi:10.1036/0071395415. 
2. ^ Warren, Carl (2008). Survey of Accounting. Cincinnati: South-Western College Pub. p. 128-132. ISBN 9780324658262. 

References

• Harry I. Wolk, James L. Dodd, Michael G. Tearney. Accounting Theory: Conceptual Issues in a Political and Economic Environment (2004). ISBN 0324186231.
• Angelico A. Groppelli, Ehsan Nikbakht. Finance (2000). ISBN 0764112759.
• Barry J. Epstein, Eva K. Jermakowicz. Interpretation and Application of International Financial Reporting Standards (2007). ISBN 9780471798231.
• Jan R. Williams, Susan F. Haka, Mark S. Bettner, Joseph V. Carcello. Financial & Managerial Accounting (2008). ISBN 9780072996500.

External links

• Income Statement Information and examples from Financial Statement School
• Understanding The Income Statement Article from Investopedia

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