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 andexpenses 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.
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
[edit]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.
[edit]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.
[edit]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 donot 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.
[edit]
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.
Earnings Per Share = (Net Income - Preferred Stock Dividends) / 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.
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 ------------------------------------------------------------------------------
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