Income Statement

If the business is a corporation with common stock that is publicly traded, it is required that the net income, discontinued operations, and extraordinary items be shown on the income statement on an after-tax, per-share basis.

The notes (or footnotes) to the income statement and to the other financial statements are considered to be part of the financial statements. The notes inform the readers about such things as significant accounting policies, commitments made by the company, and potential liabilities and potential losses. The notes contain information that is critical to properly understanding and analyzing a company's financial statements.

It is common for the notes to the financial statements of large companies to be 10-20 pages in length. Go to the website for a company whose stock is publicly traded and locate its annual report. Look at the notes near the end of the annual report.

The single-step and multiple-step income statement formats are the required formats when the statement is distributed to people and places outside of the company. The company's management, however, might prefer other formats when the profit and loss statement remains inside the company.

For example, a company might want to prepare an income statement—for inside the company only—that focuses on the contribution margin instead of the gross profit or gross margin. Such a format may provide insight on how the company's profits change as sales change. This format also shows the total amount of fixed expenses (those expenses that will not change as sales change). This type of internal income statement is shown below (and columns have been added to show the amounts by product line).

As you can see above, $2,000 of fixed expenses are common to both product lines. In other words they cannot be traced directly to Product Line 1 or Product Line 2. Rather than mislead someone, the expenses are not arbitrarily divided up between the product lines.

Remember that this format is not acceptable for distribution outside of the company—its accessibility should be limited to the members of the company's management. In fact, this type of income statement is usually covered as part of managerial accounting, not financial accounting. It is shown here to let you know that income statement formats other than the single-step and multiple-step are permissible when they stay within a company, and may prove very useful to a company's managers.

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Because the material covered here is considered an introduction to this topic, many complexities have been omitted. You should always consult with an accounting professional for assistance with your own specific circumstances.

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