Intriioiiducintrotioniiiiiiiiiiiiiiiiiiiiiiiiiiiiii To Income Statement

Introduction to income statement
The income statement is one of the major financial statements used by accountants and
business owners. (The other major financial statements are the balance sheet,
statement of cash flows, and the statement of stockholders' equity.) The income
statement is sometimes referred to as the profit and loss statement (P&L), statement of
operations, or statement of income. We will use income statement and profit and loss
statement throughout this explanation.
The income statement is important because it shows the profitability of a company
during the time interval specified in its heading. The period of time that the statement
covers is chosen by the business and will vary
For example, the heading may state:
"The Fiscal Year Ended September 30, 2010" (The period of October 1, 2009 through
September 30, 2010.)
Expenses and losses

People pay attention to the profitability of a company for many reasons. For example, if
a company was not able to operate profitably—the bottom line of the income statement
indicates a net loss—a banker/lender/creditor may be hesitant to extend additional
credit to the company. On the other hand, a company that has operated profitably—the
bottom line of the income statement indicates a net income—demonstrated its ability to
use borrowed and invested funds in a successful manner. A company's ability to
operate profitably is important to current lenders and investors, potential lenders and
investors, company management, competitors, government agencies, labor unions, and
others.
The format of the income statement or the profit and loss statement will vary according
to the complexity of the business activities. However, most companies will have the
following elements in their income statements:
A. Revenues and Gains

1. Revenues from primary activities
2. Revenues or income from secondary activities
3. Gains (e.g., gain on the sale of long-term assets, gain on lawsuits)
B. Expenses and Losses

1. Expenses involved in primary activities
2. Expenses from secondary activities
3. Losses (e.g., loss on the sale of long-term assets, loss on lawsuits)
If the net amount of revenues and gains minus expenses and losses is positive, the
bottom line of the profit and loss statement is labeled as net income. If the net amount
(or bottom line) is negative, there is a net loss.
B. Eand Losses
1. Expenses involved in primary activities are expenses that are incurred in order to
earn normal operating revenues. Under the accrual basis of accounting sales
commissions expense should appear on the income statement in the same period that
the related sales are reported, regardless of when the commission is actually paid. In
the same way, the cost of goods sold is matched with the related sales on the income
statement, regardless of when the supplier of the merchandise is paid.
Costs used up (or expiring) in the accounting period shown in the heading of the income
statement are also considered to be expenses of that period. For example, the utilities
used in a retail store in December should appear on the December income statement,
even if the utility's meters are not read until January 1 and the bill is paid on February 1.
The above examples reflect the matching principle and show that under the accrual
basis of accounting, expenses on the income statement are likely to be reported at
different times than the cash expenditures/disbursements.
It is common for expenses to occur before the company pays for them (e.g., wages
earned by employees, employee bonuses and vacations, utilities, and sales
commissions). However, some expenses occur after the company has paid for them.
For example, let's say a company buys a building on December 31, 2010 for $300,000
(excluding the cost of land). The building is assumed to have a useful life of 30 years.
The company paid cash for the building on December 31, 2010 but it will record
depreciation expense of $10,000 in each of the years 2011 through 2040.
Some expenses are matched against sales on the income statement because there is a
cause and effect linkage—the sale of the merchandise caused the cost of goods sold
and the sales commission expense. Other expenses are not directly linked to sales and
as a result they are matched to the accounting period when they are consumed or used
—examples include utilities expense, office salaries expense, and depreciation
expense. Some expenses such as advertising expense and research and development
expense can neither be linked with sales nor a specific accounting period and as a
result, they are reported as expenses as soon as they occur.
Types of income ststements
1. A single-step income statement is one of two commonly used formats
for the income statement or profit and loss statement. The single-step format uses
only one subtraction to arrive at net income.
Net Income = (Revenues + Gains) – (Expenses + Losses)

An extremely condensed income statement in the single-step format would look like
this:
Sample Products Co.

Income Statement
The heading of For the Five Months Ended May 31, the income
statement 2010 conveys critical
information. The name of the
company appears Revenues & Gains $108,000 first, followed by
the title "Income Expenses & Losses 90,000 Statement." The
third line tells the Net Income $ 18,000 reader the time
interval reported on the profit and
loss statement. Since income statements can be prepared for any period of time, you
must inform the reader of the precise period of time being covered. (For example, an
income statement may cover any one of the following time periods: "Year Ended May
31," "Five Months Ended May 31," "Quarter Ended May 31," "Month Ended May 31, or
"Five Weeks Ended May 31".)
2. Multistep income statement
An alternative to the single-step income statement is the multiple-step income
statement, because it uses multiple subtractions in computing the net income shown on
the bottom line.
The multiple-step profit and loss statement segregates the operating revenues and
operating expenses from the nonoperating revenues, nonoperating expenses, gains,
and losses. The multiple-step income statement also shows the gross profit (net sales
minus the cost of goods sold).
Here is a sample income statement in the multiple-step format:
$100,000
Sales
Cost of Goods Sold 75,000
Gross Profit 25,000
Operating Expenses
Selling Expenses
Advertising Expense 2,000
Commissions Expense 5,000 7000
Administrative Expenses
Office Supplies Expense 3,500
Office Equipment Expense 2,500 6000
Total Operating Expenses 13,000
Operating Income 12,000

Non-Operating or Other
Interest Revenues 5,000
Gain on Sale of Investments 3,000
Interest Expense (500)
Loss from Lawsuit (1,500)
Total Non-Operating 6,000
Net Income $ 18,000

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Introduction to income statement

Expenses and losses

A. Revenues and Gains

B. Expenses and Losses

Net Income = (Revenues + Gains) – (Expenses + Losses)

Sample Products Co.

Here is a sample income statement in the multiple-step format:

Operating Income 12,000

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