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Income Statement(Cheat Sheet)

Author:
Harold Averkamp, CPA, MBA

Income Statement

The income statement is also known as the statement of income, statement of operations, statement of earnings, profit and loss statement, and P&L. It reports a corporation’s revenues, expenses, gains, losses, and the resulting net income that occurred during the period of time shown in the heading of the income statement. The period of time (or time interval) could be a year, quarter, five months, one month, 52 weeks, 4 weeks, etc.

If the corporation’s shares of common stock are publicly traded, the earnings per share of common stock must also appear on the face of the income statement.

As with all of the external financial statements, the notes to the financial statements are to be referenced on the face of the income statement, and should be distributed with the financial statements.

Generally Accepted Accounting Principles

In the U.S., an income statement that is distributed to someone outside of the corporation must comply with generally accepted accounting principles (referred to as GAAP or US GAAP). US GAAP includes basic underlying concepts such as the cost principle and matching principle to some very complex accounting standards developed by the Financial Accounting Standards Board (FASB).

As a result of US GAAP, a corporation’s income statement will be prepared using the accrual method of accounting (as opposed to the cash method). Under the accrual method, revenues will be included on the income statement in the period in which they are earned (which often occurs before the receipt of cash). The accrual method also means that expenses will appear on the income statement when they best match the revenues or when a cost expires or is used up (instead of when the cash is paid out).

Double-entry accounting, debits and credits, and the accounting equation result in a connection between the income statement and the balance sheet. For example, the net income from the income statement increases the retained earnings reported on the balance sheet.

Components or Elements of the Income Statement

  1. Revenues
    • Operating revenues such as the sale of goods and fees earned from providing services
    • Nonoperating revenues (or other income), earned peripheral activities. An example is interest income that is earned by a retailer when it invests its idle cash.
  2. Expenses
    • Operating expenses such as the cost of goods sold, selling and administrative expenses
    • Nonoperating expenses (or other expenses) which were incurred but were outside of the corporation’s main activities. An example is the interest expense incurred by a retailer.
  3. Gains
    • An example is the Gain on Sale of a Plant Asset which resulted from selling a plant asset for more than the asset’s book value.
  4. Losses
    • An example is the Loss on Sale of a Plant Asset which resulted from selling a plant asset for less than the asset’s book value.

The net result (or combination) of these components is a corporation’s net income or net earnings.

Format of Income Statement

Accounting textbooks often present two types of income statement formats:

  • Multiple-step. This format has more than one subtraction before displaying the company’s net income. The following is a condensed version of a multiple-step income statement:

  • Single-step. This format has only one subtraction before displaying the company’s net income. In other words, all revenues (operating and nonoperating) minus all expenses (operating and nonoperating) equals net income. The following is a condensed version of the single-step income statement:

Cost of Goods Sold

The cost of goods sold or cost of sales is likely the largest expense on the income statement of a retailer or manufacturer. Since the amount is very significant it is important that the proper costs are matched with the sales revenues.

On the internal financial statements of a retailer, the cost of goods sold (COGS) might be presented in one of two ways:

  1. The COGS could be calculated as the cost of the beginning inventory plus the cost of its net purchases minus the cost of the ending inventory:

  2. The COGS could be calculated as the cost of the net purchases minus the increase in the cost of the company’s inventory:

Gross Profit

Gross profit is the remainder of a company’s net sales minus its cost of goods sold. Gross profit is often expressed as a dollar amount and as a percentage of net sales. The gross profit is also known as gross margin.

Selling, General and Administrative (SG&A) Expenses

Selling, general and administrative (SG&A) expenses are a company’s operating expenses (along with the cost of goods sold). SG&A expenses are not considered to be product costs and therefore are not inventoriable costs. Rather, SG&A expenses are considered to be expenses of the accounting period.

Inventory Cost Flow Assumptions

When inventory items are purchased at different unit costs during the year, a company must elect a cost flow assumption. In the U.S. the options are 1) first costs in are the first costs out (first-in, first-out or FIFO), 2) last costs in are first costs out (last-in, first-out or LIFO), 3) average costs, 4) specific identification, and others. The inventory systems could be periodic or perpetual. Hence, the combination of the cost flow assumptions and the system used can result in differing amounts for the cost of goods sold, gross profit, net income, taxable income, and income tax expense being reported on the income statement.

Notes to the Income Statement

In addition to the amounts appearing on the face of the income statement, there needs to be a reference such as “See notes to the financial statements.” or “The accompanying notes are an integral part of the financial statements.” The notes to the financial statements are important because a corporation’s net income is dependent on the accounting policies regarding inventory, depreciation, revenue recognition, and more. There may also be some potential losses that are looming, but have not yet been finalized. Hence, the notes will disclose this and other important information pertinent to the income statement and the other financial statements.

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About the Author

Harold Averkamp

For the past 52 years, Harold Averkamp (CPA, MBA) has worked as an accounting supervisor, manager, consultant, university instructor, and innovator in teaching accounting online. He is the sole author of all the materials on AccountingCoach.com.

Learn More About Harold

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