# Income statement

Last updated

An income statement or profit and loss account [1] (also referred to as a profit and loss statement (P&L), statement of profit or loss, revenue statement, statement of financial performance, earnings statement, statement of earnings, operating statement, or statement of operations) [2] is one of the financial statements of a company and shows the company's revenues and expenses during a particular period. [1]

## Contents

It indicates how the revenues (also known as the “top line”) are transformed into the net income or net profit (the result after all revenues and expenses have been accounted for). The purpose of the income statement is to show managers and investors whether the company made money (profit) or lost money (loss) during the period being reported.

An income statement represents a period of time (as does the cash flow statement). 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. [3] Revenues and expenses are further categorized in the statement of activities by the donor restrictions on the funds received and expended. Income statement is useless.

The income statement can be prepared in one of two methods. [4] The Single Step income statement totals revenues and subtracts expenses to find the bottom line. The Multi-Step income statement takes several steps to find the bottom line: starting with the gross profit, then calculating operating expenses. Then 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 may help investors and creditors determine the past financial performance of the enterprise, predict the future performance, and assess the capability of generating future cash flows using the report of 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).
                - 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 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: [5]

### Operating section

• Revenue - Cash inflows or other enhancements of assets (including accounts receivable) 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. [6]
• Expenses - Cash outflows or other using-up of assets or incurrence of liabilities (including accounts payable) 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 (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 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 / Amortization - the charge with respect to fixed assets / intangible assets that have been capitalised on the balance sheet 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. [6]

### Non-operating section

• Other revenues or gains - revenues and gains from other than primary business activities (e.g., rent, income from patents, goodwill). 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 expenses , bank charges).
• Income tax expense - sum of the amount of tax payable to tax authorities in the current reporting period (current tax liabilities/ tax payable) and the amount of deferred tax 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 instead of weighted average method. The changes should be applied retrospectively and shown as adjustments to the beginning balance of affected components in Equity. 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 under IFRS regulations, but are permissible under US GAAP. (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: [5] (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 (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.

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

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.

## 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 accounts, but it shows the most usual ones. Differences between IFRS and US GAAP would affect the interpretation of the following sample income statements.

Fitness Equipment Limited                                   INCOME STATEMENTS                                     (in millions)    Year Ended March 31,                         2019          2020           2021  ----------------------------------------------------------------------------------   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,                                     2019         2020         2021  ----------------------------------------------------------------------------------------------   [[Revenue]]                                                  36,525.9   29,827.6   21,186.8   [[Cost of sales]]                                            (18,545.8)   (15,858.8)   (11,745.5)                                                          -----------  -----------  ------------   ''[[Gross profit]]                                              17,980.1     13,968.8      9,441.3  ''                                                          -----------  -----------  ------------    Operating expenses:     [[SG&A|Selling, general and administrative expenses]]           (4,142.1)    (3,732.3)     (3,498.6)     [[Depreciation]]                                             (602.4)      (584.5)       (562.3)     [[Amortization]]                                             (209.9)      (141.9)       (111.8)     [[Impaired asset|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]] expense                                       (1,678.6)    (3,510.5)    (1,789.9)   Profit (or loss) from [[associate company|associates]], ''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)    4,461.4     2,486.4

## 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.

After revision to IAS 1 in 2003, the Standard is now using profit or loss for the year 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 issued a revised IAS 1: Presentation of Financial Statements, which is effective for annual periods beginning on or after 1 January 2009.

• 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 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: [5] (IAS 1.82)

1. Revenue
2. Finance costs (including interest expenses)
3. Share of the profit or loss of associates and joint ventures accounted for using the equity method
4. Tax 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
• 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.

## Related Research Articles

International Financial Reporting Standards, commonly called IFRS, are accounting standards issued by the IFRS Foundation and the International Accounting Standards Board (IASB). They constitute a standardised way of describing the company’s financial performance and position so that company financial statements are understandable and comparable across international boundaries. They are particularly relevant for companies with shares or securities listed on a public stock exchange.

Financial statements are formal records of the financial activities and position of a business, person, or other entity.

In accounting, an economic item's historical cost is the original nominal monetary value of that item. Historical cost accounting involves reporting assets and liabilities at their historical costs, which are not updated for changes in the items' values. Consequently, the amounts reported for these balance sheet items often differ from their current economic or market values.

In accounting, revenue is the income or increase in net assets that an entity has from its normal activities. Commercial revenue may also be referred to as sales or as turnover. Some companies receive revenue from interest, royalties, or other fees. "Revenue" may refer to income in general, or it may refer to the amount, in a monetary unit, earned during a period of time, as in "Last year, Company X had revenue of \$42 million". Profits or net income generally imply total revenue minus total expenses in a given period. In accounting, in the balance statement, revenue is a subsection of the Equity section and revenue increases equity, it is often referred to as the "top line" due to its position on the income statement at the very top. This is to be contrasted with the "bottom line" which denotes net income.

In accounting, book value is the value of an asset according to its balance sheet account balance. For assets, the value is based on the original cost of the asset less any depreciation, amortization or impairment costs made against the asset. Traditionally, a company's book value is its total assets minus intangible assets and liabilities. However, in practice, depending on the source of the calculation, book value may variably include goodwill, intangible assets, or both. The value inherent in its workforce, part of the intellectual capital of a company, is always ignored. When intangible assets and goodwill are explicitly excluded, the metric is often specified to be "tangible book value".

Expenditure is an outflow of money, or any form of fortune in general, 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 referred to as an expense. An expense is a cost that is "paid" or "remitted", usually in exchange for something of value. Something that seems to cost a great deal is "expensive". Something that seems to cost little is "inexpensive". "Expenses of the table" are expenses of dining, refreshments, a feast, etc.

Cost of goods sold (COGS) is the carrying value of goods sold during a particular period.

In accountancy, depreciation refers to two aspects of the same concept: first, the actual decrease of fair value of an asset, such as the decrease in value of factory equipment each year as it is used and wears, and second, the allocation in accounting statements of the original cost of the assets to periods in which the assets are used.

An intangible asset is an asset that lacks physical substance. Examples are patents, copyright, franchises, goodwill, trademarks, and trade names, as well as software. This is in contrast to physical assets and financial assets. An intangible asset is usually very difficult to evaluate. They suffer from typical market failures of non-rivalry and non-excludability.

Tax deduction is a reduction of income that is able to be taxed and is commonly a result of expenses, particularly those incurred to produce additional income. Tax deductions are a form of tax incentives, along with exemptions and credits. The difference between deductions, exemptions and credits is that deductions and exemptions both reduce taxable income, while credits reduce tax.

Financial accounting is the field of accounting concerned with the summary, analysis and reporting of financial transactions related to a business. This involves the preparation of financial statements available for public use. Stockholders, suppliers, banks, employees, government agencies, business owners, and other stakeholders are examples of people interested in receiving such information for decision making purposes.

In financial accounting, a cash flow statement, also known as statement of cash flows, 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 activities. Essentially, the cash flow statement is concerned with the flow of cash in and out of the business. As an analytical tool, the statement of cash flows is useful in determining the short-term viability of a company, particularly its ability to pay bills. International Accounting Standard 7 is the International Accounting Standard that deals with cash flow statements.

In bookkeeping, an account refers to assets, liabilities, income, expenses, and equity, as represented by individual ledger pages, to which changes in value are chronologically recorded with debit and credit entries. These entries, referred to as postings, become part of a book of final entry or ledger. Examples of common financial accounts are sales, accounts receivable, mortgages, loans, PP&E, common stock, sales, services, wages and payroll.

In business and accounting, net income is an entity's income minus cost of goods sold, expenses, depreciation and amortization, interest, and taxes for an accounting period.

Fixed assets, also known as long-lived assets, tangible assets or property, plant and equipment (PP&E), is a term used in accounting for assets and property that cannot easily be converted into cash. Fixed assets are different than current assets, such as cash or bank accounts, because the latter are liquid assets. In most cases, only tangible assets are referred to as fixed.

In financial accounting, operating cash flow (OCF), cash flow provided by operations, cash flow from operating activities (CFO) or free cash flow from operations (FCFO), refers to the amount of cash a company generates from the revenues it brings in, excluding costs associated with long-term investment on capital items or investment in securities. Operating activities include any spending or sources of cash that’s involved in a company’s day-to-day business activities. The International Financial Reporting Standards defines operating cash flow as cash generated from operations, less taxation and interest paid, gives rise to operating cash flows. To calculate cash generated from operations, one must calculate cash generated from customers and cash paid to suppliers. The difference between the two reflects cash generated from operations.

A chart of accounts (COA) is a list of financial accounts set up, usually by an accountant, for an organization, and available for use by the bookkeeper for recording transactions in the organization's general ledger. Accounts may be added to the chart of accounts as needed; they would not generally be removed, especially if any transaction had been posted to the account or if there is a non-zero balance.

In accrual accounting, the revenue recognition principle states that revenues should be recorded during the period in which they are earned, regardless of when the transfer of cash occurs. And the matching principle instructs that an expense should be reported in the same period in which the corresponding revenue is earned, and is associated with accrual accounting. By recognizing costs in the period they are incurred, a business can see how much money was spent to generate revenue, reducing "noise" from timing mismatch between when costs are incurred and when revenue is realized. Conversely, cash basis accounting calls for the recognition of an expense when the cash is paid, regardless of when the expense was actually incurred.

Deferred tax is a notional asset or liability to reflect corporate income taxation on a basis that is the same or more similar to recognition of profits than the taxation treatment. Deferred tax liabilities can arise as a result of corporate taxation treatment of capital expenditure being more rapid than the accounting depreciation treatment. Deferred tax assets can arise due to net loss carry-overs, which are only recorded as asset if it is deemed more likely than not that the asset will be used in future fiscal periods. Different countries may also allow or require discounting of the assets or particularly liabilities. There are often disclosure requirements for potential liabilities and assets that are not actually recognised as an asset or liability.

International Accounting Standard 16 Property, Plant and Equipment or IAS 16 is an international financial reporting standard adopted by the International Accounting Standards Board (IASB). It concerns accounting for property, plant and equipment, including recognition, determination of their carrying amounts, and the depreciation charges and impairment losses to be recognised in relation to them.

## References

1. Professional English in Use - Finance, Cambridge University Press, p. 10
2. Helfert, Erich A. (2001). "The Nature of Financial Statements: The Income Statement". . McGraw-Hill. p.  40. doi:10.1036/0071395415.
3. Warren, Carl (2008). Survey of Accounting. Cincinnati: South-Western College Pub. pp.  128–132. ISBN   978-0-324-65826-2.
4. "Presentation of Financial Statements" International Accounting Standards Board. Accessed 17 July 2010.
5. [ citation needed ]
• Harry I. Wolk, James L. Dodd, Michael G. Tearney. Accounting Theory: Conceptual Issues in a Political and Economic Environment (2004). ISBN   0-324-18623-1.
• Angelico A. Groppelli, Ehsan Nikbakht. Finance (2000). ISBN   0-7641-1275-9.
• Barry J. Epstein, Eva K. Jermakowicz. Interpretation and Application of International Financial Reporting Standards (2007). ISBN   978-0-471-79823-1.
• Jan R. Williams, Susan F. Haka, Mark S. Bettner, Joseph V. Carcello. Financial & Managerial Accounting (2008). ISBN   978-0-07-299650-0.