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. It is very important for the business. 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 1,494 -------- TOTAL EXPENSES (195,515) -------- NET INCOME 100,882 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:
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. •
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 / amortisation - 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 classifications selling expenses and administrative expenses.) under US GAAP.
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: (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. \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==