Income Statement

• Reports revenues and expenses of the firm over a period of time

  Income Statement
• Also referred to as statement of operation, statement of earnings or profit & loss statement

  Income Statement
• Under US GAAP & IFRS, the income statement can be presented separately or together as a single statement of comprehensive income.
• Investors examine a firm's income statement for valuation purposes.
• Lenders examine a firm's income statement for information about ability to make promised interest and principal payments.
• Amount reported from the sale of goods and services in the normal course of business

  Revenue
• Revenue - adjustments for estimated returns and allowances


  Net Revenue
• Amounts incurred to generate revenue and include costs of goods sold, operating expenses, interest and taxes


  Expenses
• Grouped together by nature or by function

  Expenses
• presenting a specific account from manufacturing and administration together (e.g. depreciation)

  Expense by nature
• Presenting all costs associated with (e.g. manufacturing) together

  Expense by function
• Net income = revenue - ordinary expense + other income - other expense + gains - loss
• Results in an increase (gain) or decrease (loss) of economic benefits

  Gains and losses
• When a firm has a controlling interest in a subsidiary, earnings of both firms are included in the income statements

  Consolidated Income Statement
• Also known as minority interest

  Non-controlling Interest
• Subtracted from the consolidated income to get the net income of the parent company

  Non-controlling Interest
• Income Statement Presentation Formats

  Single Step

  Multi Step
• All revenues are grouped together and all expenses are grouped together

  Single step
• Includes gross profits, revenue less cost of goods sold

  Multi step
• Remains after the direct costs of producing a product or service are subtracted from revenue

  Gross Profit
• Also referred to as operating income

  Operating profit
• Operating expense such as selling, general and administrative expense is subtracted from the gross profit

  Operating Profit
• Companies should recognize expenses at the same time as matching revenues - under matching principle

  Expense Recognition
• decrease in economic benefits during the accounting period in the from of outflows or depletion of asset or incurrence of liabilities that results in decrease in capital

  expense
• administrative cost that are expensed in the period incurred

  period cost
• when inventories are sold, the entity shall recognize the carrying amount as an expense

  inventory expense recognition
• identifies exactly which items are sold and which items remain in inventory by its identification number

  special identification method
• first item purchased is the first item sold, cost of inventory acquired first is used to calculate cost of goods sold for the period

  first-in, first-out
• last item purchased is assumed to be sold first, appropriate for inventory that does not deteriorate with age

  last-in, first-out
• popular due to tax benefits since it results in higher cogs and lower taxable income

  last-in, first-out
• no assumption about the physical flow of the inventory, cost per unit is calculated by dividing costs of available goods by total units available

  weighted average cost
• recognition of cost assigned to the use of an asset

  depreciation expense recognition
• depreciation method

  straight-line method

  accelerated depreciation

  declining balance method
• recognizes an equal amount of depreciation expense

  straight-line method
• most used depreciation method for financial reporting expense

  straight-line method
• speeds up the recognition of depreciation in a systematic way to recognize more depreciation expense in early years of the asset's life

  accelerated depreciation
• most appropriate for matching the expenses to the revenue since more assets generate more benefits in the early years of their economic life and fewer benefits in the later years

  accelerated depreciation
• applies a constant rate of depreciation to an asset'd declining book value each year

  declining balance method
• applied two times the straight-line rate to the declining balance

  double declining balance
• does not explicitly use the asset's residual value in calculation but the calculation ends once the estimated residual value has been reached

  double declining balance