Example of an Income Statement

We will be referring to the following income statement for Example Corporation as we continue our explanation of the income statement.

Example Corporation is engaged in the purchase and sale of goods (products, merchandise). It is also a regular U.S. corporation which means the income statement will include income tax expense.

Income statement is one in a set of five financial statements

Reading only the income statement is not sufficient for understanding the financial activities of a business. Therefore, a business should distribute a set of five financial statements consisting of the following:

• Income statement
• Statement of comprehensive income
• Balance sheet
• Statement of stockholders’ equity
• Statement of cash flows

In addition to the above items, the set of financial statements must also include notes to the financial statements. The notes are important because the amounts on the face of the financial statements cannot adequately communicate the complexities of a business. To make readers of the income statement (or any other financial statement) aware of the significant information in the notes, one of the following sentences is shown near the bottom of every financial statement:

• See Notes to Financial Statements.
• See accompanying Notes to Financial Statements.
• See accompanying notes.
• The accompanying notes are an integral part of the financial statements.
• The accompanying Notes to Financial Statements are an integral part of this financial statement.

Comparative income statement

A comparative income statement displays three columns of amounts. This gives the reader two years of previous income statement amounts to put the most recent year’s amounts in perspective.

Since the column containing the amounts from the most recent year is the most relevant, it will be positioned closest to the descriptions. The column containing the oldest amounts is positioned furthest from the descriptions.

The heading of a comparative annual income statement will be changed to read “Years ended December 31″ (since three years of income statements are shown. The years will be indicated at the top of each column of amounts.

Rounding of amounts

Except for small companies, the amounts shown on the income statement are likely rounded to the nearest thousand or million dollars (along with a notation to inform the reader).

For example, the income statement of a large corporation with sales of $8,349,792,354.78 will report $8,349.8 and a notation such as (In millions, except earnings per share).

The income statement of a mid-size corporation with sales of $24,340,290.88 might report $24,340 and the notation (In thousands except per share amounts).

Rounding amounts is beneficial because it allows readers to focus on the most important digits. Omitting insignificant digits is also justified by the concept of materiality, because a lender or investor will not be misled without the least important digits.