Income statement

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 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.^[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.

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).

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. It is 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 will not recur. 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.

${\text{Earnings per share}}={\frac {{\text{Net income}}-{\text{Preferred stock dividends}}}{\text{Weighted average of common stock shares outstanding}}}$

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.hh

                                     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.

Notes

^ ^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. {{cite book}}: Cite has empty unknown parameter: |coauthors= (help)
^ Warren, Carl (2008). Survey of Accounting. Cincinnati: South-Western College Pub. pp. 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

[helfert-a-1] 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. {{cite book}}: Cite has empty unknown parameter: |coauthors= (help)

[2] Warren, Carl (2008). Survey of Accounting. Cincinnati: South-Western College Pub. pp. 128–132. ISBN 9780324658262.

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