Income Statements

12 Key excerpts on "Income Statements"

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  eBook - ePub

  Financial Accounting

  • Bev Vickerstaff, Parminder Johal(Authors)
  • 2014(Publication Date)
  • Routledge

    (Publisher)

  4 The income statement

  ‘If there is

  excitement

  in their lives, it is contained in the figures on the

  profit and loss Sheet

  . What an indictment’

  DAME ANITA RODDICK, British entrepreneur and founder of the Body Shop (Source: Body and Soul co-written with Russell Miller, 1991)

  CHAPTER OUTLINE 4.1   Introduction 4.2   The basic income statement 4.3   Understanding the terminology 4.4   Preparing an income statement 4.5   Service organizations 4.6   Company Income Statements 4.7   Published Income Statements 4.8   Limitations of the income statement 4.8   Summary

  CHAPTER OBJECTIVES After carefully reading the text and completing the tasks and activities provided in this chapter you should have a better understanding and knowledge of: •   the purpose of theincome statement •   the contents of the income statement •   the terminology used in the income statement •   the presentation of the income statement •   the limitations of the income statement.

  4.1 Introduction

  When an individual sets up in business they generally do so to make a profit. Consequently, the owner needs to know how to make sure the business is actually making a profit and how much profit it is making. This is done formally in a financial statement called an income statement. Income Statements are usually prepared for a period covering a year, coinciding with the annual accounting date, but they can be prepared for any length of time.

  An income statement is a financial statement that shows the revenue, expenses and profit or loss of a business for a given period of time. The calculation of the profit is one of the most interesting accounting functions. The income statement is a useful statement for the stakeholders as it shows them how well the business is performing. It can be used to assist the business externally in applying for a bank loan or showing a potential buyer the details of the business’s performance. It may also be used internally to assist with future planning and controlling expenses, by making comparisons to previous years. The net profit

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  eBook - PDF

  Wiley Pathways Business Math

  • Steve Slavin, Tere Stouffer(Authors)
  • 2015(Publication Date)
  • Wiley

    (Publisher)

  A balance sheet, on the other hand, provides a snapshot of a company’s finances on one particular date, perhaps the first day of a year, the first day of a quarter, and so on. 12.1 The Income Statement An income statement (also called a profit and loss statement) tells you—as well as investors in your company—how profitable the company has been over a given period. A company with high sales but even higher expenses is not a prof- itable company; similarly, a company with low sales but few expenses may be turning a healthy profit. 12.1.1 How an Income Statement Is Set Up The basic formula used in an income statement is For a lemonade stand, finding net income is pretty simple: You add up all the money received; subtract the expenses of lemonade mix, cups, and posters; and arrive at net income. But most companies are far more complex than this, and you have to do some figuring to find out what the sales and costs amount to. You have to consider the following: ▲ Net sales: The net sales is the amount the company sold after all returns, discounts, and other allowances are deducted. To find net sales, you start with gross sales (the total amount sold, also called total sales) and subtract returns and allowances. In other words, (Note: Net sales is often referred to as revenue.) ▲ Costs of goods sold: You can figure out the cost of selling products, also called the cost of goods sold (COGS), by starting with the value of the inventory at the beginning of a period (say, the beginning of a quar- ter, for a quarterly income statement), subtracting the value of the inven- tory at the end of the period, and adding in any purchases. In other words, Costs of goods sold  Beginning inventory  Ending inventory  Purchases Net sales  Gross sales  Returns and allowances Sales  Costs  Net income

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  eBook - ePub

  Financial Intelligence, Revised Edition

  A Manager's Guide to Knowing What the Numbers Really Mean

  • Karen Berman, Joe Knight, John Case(Authors)
  • 2013(Publication Date)
  • Harvard Business Review Press

    (Publisher)

  We’ll focus on the basics of understanding an income statement, because “profit” is no more and no less than what shows up there. Learn to decipher this document, and you will be able to understand and evaluate your company’s profitability. Learn to manage the lines on the income statement that you can affect, and you will know how to contribute to that profitability. Learn the art involved in determining profit, and you will definitely increase your financial intelligence. You might even get where you are going.

  A (VERY) LITTLE ACCOUNTING

  We promised in the previous chapter to include only a smattering of accounting procedures in this book. There is one accounting idea, however, that we will explain in this chapter, because once you understand it, you will grasp exactly what the income statement is and what it is trying to tell you. First, though, we want to back up one step and make sure there isn’t a major misconception lurking in your mind.

  You know that the income statement is supposed to show a company’s profit for a given period—usually a month, a quarter, or a year. It’s only a short leap of imagination to conclude that the income statement shows how much cash the company took in during that period, how much it spent, and how much was left over. That “left over” amount would then be the company’s profit, right?

  Alas, no. Except for some very small businesses that do their accounting this way—it’s called cash-based accounting —that notion of an income statement and profit is based on a fundamental misconception. In fact, an income statement measures something quite different from cash in the door, cash out the door, and cash left over. It measures sales or revenues, costs or expenses , and profit or income .

  Any income statement begins with sales. When a business delivers a product or a service to a customer, accountants say it has made a sale. Never mind if the customer hasn’t paid for the product or service yet—the business may count the amount of the sale on the top line of its income statement for the period in question. No money at all may have changed hands. Of course, for cash-based businesses such as retailers and restaurants, sales and cash coming in are pretty much the same. But most businesses have to wait thirty days or more to collect on their sales, and manufacturers of big products such as airplanes may have to wait many months. (You can see that managing a company such as Boeing would entail having a lot of cash on hand to cover payroll and operating costs until the company is paid for its work. We’ll get to a concept known as working capital, which helps you assess such matters, in part 7

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  eBook - ePub

  Financial Intelligence for IT Professionals

  The Story of the Numbers

  • Julie Bonner(Author)
  • 2021(Publication Date)
  • CRC Press

    (Publisher)

  Part Two Revenue and Expense The Basics of Income Statements

  DOI: 10.1201/9781003110613-2

  Before we go too much further, a definition of accounting and a definition of finance would be helpful. For purposes of this book, finance is about the interpretation and strategies of the financial numbers in a business, and accounting is the structure and mechanics that create those financial numbers in a company.

  For example, in creating a financial statement, many details go into that summarized statement. For instance, a company will generate sales, but the financial statement will show only one number for ALL sales. Thus, all that detailed work to create the consolidated sales number is what accounting is all about. However, once you know the total sales for your company and you start analyzing that information, you are getting into the interpretation of the financial information. Thus you are then in the world of finance.

  The income statement is an essential financial statement to understand1 . Within this topic area, you will learn why the income statement represents an ESTIMATE of profit. Thus, it is essential to note that estimated profits do NOT equate to the company's cash. There are many reasons for this, and you may find the book repeating information about this critical distinction. The repetition matters – because it is a crucial difference that must be understood to make sense of financial information.

  Every section of the income statement will be reviewed to understand the business activity that each section represents. Along the way, you will be given details about different naming conventions, not only for this financial statement itself but for the different accounts represented on the financial statement itself. As stated before, the various approaches to naming conventions will often trip up a student in learning how to interpret financial information. Once you know that one naming convention you see is the same as another different name, then you are far ahead on the learning curve.

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  eBook - ePub

  Accounting For Canadians For Dummies

  • John A. Tracy, Cecile Laurin(Authors)
  • 2019(Publication Date)
  • For Dummies

    (Publisher)

  Part 2

  Exploring Financial Statements

  IN THIS PART …

  Get to know the ins and outs of the income statement, which summarizes the profit-making activities of the business and its bottom-line profit or loss for the period.

  Find out how the balance sheet reports the financial condition of the business at a point in time — especially on the last day of the profit period.

  Understand what’s included in the statement of cash flows, which reports the amount of cash generated from profit and other sources of cash during the period and what the business did with this money.

  Make sure you’re up to speed on the topic of adequate disclosure in external financial reports to the creditors and investors of a business. Business financial reports should reveal all the information that the creditors and investors are entitled to know.

  Passage contains an image Chapter 4

  Reporting Revenue, Expenses, and the Bottom Line

  IN THIS CHAPTER

  Taking a look at a typical income statement

  Getting inquisitive about the income statement

  Becoming more intimate with assets and liabilities

  Handling unusual gains and losses in the income statement

  In this chapter, we lift up the hood and explain how the profit engine runs. Making a profit is the main financial goal of a business. (Not-for-profit organizations and government entities don’t aim to make profit, but they should at least avoid overall losses.) Accountants are the designated financial scorekeepers in the business world. Accountants are professional profit-measurers. We find profit accounting a fascinating challenge. For one thing, we have to understand how a business operates and its strategies to account for its profit.

  Making a profit and accounting for it aren’t nearly as simple as you may think. Managers have the demanding tasks of making sales and controlling expenses, and accountants have the tough tasks of measuring revenue and expenses and preparing reports that summarize the profit-making activities. Also, accountants are called on to help business managers analyze profit for decision making, which we explain in Chapter 9 . And accountants prepare profit budgets for managers, which we cover in Chapter 10

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  eBook - PDF

  Financial Intelligence for IT Professionals

  What You Really Need to Know About the Numbers

  • Karen Berman, Joe Knight, John Case(Authors)
  • 2008(Publication Date)
  • Harvard Business Review Press

    (Publisher)

  You can see how far we are from cash in and cash out. Tracking the flow of cash in and out the door is the job of another financial document, namely the cash flow statement (part 4). You can also see how far we are from simple objective reality. Accountants can’t just tote up the flow of dollars; they have to decide which costs are associated with the sales. They have to make assumptions and come up with estimates. In the process, they may introduce bias into the numbers. THE PURPOSE OF THE INCOME STATEMENT In principle, the income statement tries to measure whether the products or services that a company provides are profitable when everything is added up. It’s the accountants’ best effort to show the sales the company generated during a given time period, the costs incurred in making those sales, and the profit, if any, that is left over. The costs incurred encompass everything related to operating the business for that span of time, includ-ing a prorated share of capital expenditures. IT is part of those costs. Possible bias aside, this is a critically important endeavor for nearly every manager in a business to understand. An information technology manager should know the profitability of products or services so that he knows where the company’s strategic priorities are likely to lie. He should also know the changes in profitability of various parts of the business so that he can be prepared for operational changes—and so that he can help determine whether the resulting technology needs are strategic, informa-tional, transactional, or infrastructure related. Similarly, a sales manager needs to know what kind of profits she and her team are generating so that she can make decisions about discounts, terms, which customers to pur-sue, and so on. A marketing manager needs to know which products are most profitable so that those can be emphasized in marketing campaigns.

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  eBook - PDF

  Intermediate Accounting IFRS

  • Donald E. Kieso, Jerry J. Weygandt, Terry D. Warfield(Authors)
  • 2020(Publication Date)
  • Wiley

    (Publisher)

  The IASB’s continuing work on financial statement presentation is progressing, with an exposure draft expected soon. See the IFRS website for more information on the status of the project. It is hoped that this project on financial statement presentation will provide those necessary principles. Operating profit based on GAAP £355.7 Acquisition costs 3.9 Impairment losses 23.8 Restructuring costs 11.2 Net post-acquisition consideration and remuneration (11.5) Amortization of purchased intangible assets 50.7 Insurance proceeds and other (8.8) Adjusted operation profit £425.0 Sources: H. Hoogervorst, “The Imprecise World of Accounting,” Speech to the International Association for Accounting Education and Research (June 20, 2012); and N. Trentmann, “IASB Plans Overhaul of Financial Definitions,” Wall Street Journal (November 2, 2016); and “Primary Financial Statements: Project Overview” (IASB: September 2018). Income Statement 4-3 Income Statement LEARNING OBJECTIVE 1 Identify the uses and limitations of an income statement. The income statement is the report that measures the success of company operations for a given period of time. (It is also often called the statement of income or statement of earnings. 1 ) The business and investment community uses the income statement to determine profitability, investment value, and creditworthiness. It provides investors and creditors with information that helps to predict the amounts, timing, and uncer- tainty of future cash flows. Usefulness of the Income Statement The income statement helps users of financial statements predict future cash flows in a num- ber of ways. For example, investors and creditors use the income statement information to: 1. Evaluate the past performance of the company. Examining revenues and expenses indicates how the company performed and allows comparison to its com- petitors. For example, analysts use the income data provided by Hyundai (KOR) to compare its performance to that of Toyota (JPN).

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  eBook - ePub

  Wiley 2023 Interpretation and Application of IFRS Standards

  • (Author)
  • 2023(Publication Date)
  • Wiley

    (Publisher)

  For many years, the income statement had been widely perceived by investors, creditors, management, and other interested parties as the single most important part of an entity's basic financial statements. Beginning in the mid-twentieth century, accounting theory development was largely driven by the desire to present a meaningful income statement, even to the extent that the balance sheet sometimes became the repository for balances of various accounts, such as deferred charges and credits, which could scarcely meet any reasonable definitions of assets or liabilities. This was done largely to serve the needs of investors, who are commonly thought to use the past income of a business as the most important input to their predictions of entities' future earnings and cash flows, which in turn form the basis for their estimates of future share prices and dividends.

  Creditors look to the statement of profit or loss for insight into the borrower's ability to generate the future cash flows needed to pay interest and eventually to repay the principal amounts of the obligations. Even in the instance of secured debt, creditors do not look primarily to the statement of financial position (balance sheet), in as much as the seizure and liquidation of collateral is never the preferred route to recovery of the lender's investment. Rather, the generation of cash flows from operations—which is generally closely correlated to income—is seen as the primary source for debt service.

  Management, then, must be concerned with the statement of profit or loss due to the importance placed on it by investors and creditors. In many large corporations, senior management receives substantial bonuses relating either to profit targets or share price performance. Consequently, management sometimes devotes considerable efforts to massaging what appears in the income statement, to present the most encouraging view of the reporting entity's prospects. This means that standard setters need to bear in mind the possibilities for abuse afforded by the requirements which they put in place. Indeed, many of the requirements have been imposed in response to previous financial reporting abuses.

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  eBook - ePub

  Wiley 2021 Interpretation and Application of IFRS Standards

  • (Author)
  • 2021(Publication Date)
  • Wiley

    (Publisher)

  For many years, the income statement had been widely perceived by investors, creditors, management, and other interested parties as the single most important part of an entity's basic financial statements. Beginning in the mid‐twentieth century, accounting theory development was largely driven by the desire to present a meaningful income statement, even to the extent that the balance sheet sometimes became the repository for balances of various accounts, such as deferred charges and credits, which could scarcely meet any reasonable definitions of assets or liabilities. This was done largely to serve the needs of investors, who are commonly thought to use the past income of a business as the most important input to their predictions of entities’ future earnings and cash flows, which in turn form the basis for their estimates of future share prices and dividends.

  Creditors look to the statement of profit or loss for insight into the borrower's ability to generate the future cash flows needed to pay interest and eventually to repay the principal amounts of the obligations. Even in the instance of secured debt, creditors do not look primarily to the statement of financial position (balance sheet), in as much as the seizure and liquidation of collateral is never the preferred route to recovery of the lender's investment. Rather, the generation of cash flows from operations—which is generally closely correlated to income—is seen as the primary source for debt service.

  Management, then, must be concerned with the statement of profit or loss due to the importance placed on it by investors and creditors. In many large corporations, senior management receives substantial bonuses relating either to profit targets or share price performance. Consequently, management sometimes devotes considerable efforts to massaging what appears in the income statement, to present the most encouraging view of the reporting entity's prospects. This means that standard setters need to bear in mind the possibilities for abuse afforded by the requirements which they put in place. Indeed, many of the requirements have been imposed in response to previous financial reporting abuses.

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  Financial Accounting Theory and Analysis

  Text and Cases

  • Richard G. Schroeder, Myrtle W. Clark, Jack M. Cathey(Authors)
  • 2020(Publication Date)
  • Wiley

    (Publisher)

  6, “Elements of Financial Statements” (Stamford, CT: FASB, 1985), paras. 79–88. 3 David Solomons, “The FASB’s Conceptual Framework: An Evaluation,” Journal of Accountancy 161, no. 6 (1986): 114–124. 4 L. E. Robinson, “The Time Has Come to Report Comprehensive Income,” Accounting Horizons (June 1991): 110. 166 CHAPTER 6 Financial Statement I: The Income Statement and events that change measurable attributes of those net resources. Under the inflows and outflows approach, revenues and expenses may include items necessary to match costs with revenues, even if they do not represent changes in net resources. An important distinction between revenues and gains and expenses and losses is whether or not they are associated with ongoing operations. Over the years, this distinction has generated ques- tions concerning the nature of income reporting desired by various users of financial statements. Two viewpoints have dominated this dialogue and are termed the current operating performance concept and the all‐inclusive concept of income reporting. These viewpoints are summarized in the following paragraphs. Proponents of the current operating performance concept of income base their arguments on the belief that only changes and events controllable by management that result from current‐period decisions should be included in income. This concept implies that normal and recurring items, termed sustainable income, should constitute the principal measure of enterprise performance. That is, net income should reflect the day‐to‐day, profit‐directed activities of the enterprise, and the inclusion of other items of profit or loss distorts the meaning of the term net income. Alternatively, advocates of the all‐inclusive concept of income hold that net income should reflect all items that affected the net increase or decrease in stockholders’ equity dur- ing the period, with the exception of capital transactions.

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  Financial Accounting Theory and Analysis

  Text and Cases

  • Richard G. Schroeder, Myrtle W. Clark, Jack M. Cathey(Authors)
  • 2022(Publication Date)
  • Wiley

    (Publisher)

  The SEC requires all companies to provide three-year comparative Income Statements and two-year comparative balance sheets. Consequently, most publicly held companies also provide similar data in their annual reports. The components of the traditional income statement exclusive of the elements of other comprehensive income (OCI) are discussed in the following paragraphs. The elements of OCI are discussed later in the chapter. Income from Continuing Operations The amounts disclosed to arrive at income from continuing operations are the company’s normal and recurring revenues and expenses. The resulting income figure represents the amount expected to recur in the future, often referred to as the company’s sustainable income. Sustainable income is the amount investors should use as a starting point to predict future earnings. In addition, 4 5 Financial Accounting Standards Board, Statement of Financial Accounting Concepts No. 5, “Recognition and Measurement in Financial Statements of Business Enterprises” (Stamford, CT: FASB, 1984), para. 35. 212 FINANCIAL STATEMENT I: THE INCOME STATEMENT the amount of income tax disclosed in this section of the income statement is the amount of income tax the company would have reported if no nonrecurring income items had been incurred. Hershey’s 2020 income statement reports “Income before Income Taxes” of $1,494,997,000 and income tax on this amount of $219,584,000; the net amount, $1,278,708,000, contains an adjustment for a loss that is attributable to a noncontrolling interest and is Hershey’s income from continuing operations. Tootsie Roll’s income before income taxes for 2020 is reported as $58,244,000. Tootsie Roll reported income taxes of $17,288,000 and income from continuing operations of $58,995,000 for 2020. Nonrecurring Items of Income Two nonrecurring items of income may also be incurred by a company. These items are discontin- ued operations and accounting changes.

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  Intermediate Accounting

  • Donald E. Kieso, Jerry J. Weygandt, Terry D. Warfield(Authors)
  • 2019(Publication Date)
  • Wiley

    (Publisher)

  Reporting Various Income Items 4-11 revenue or expense item has priority over another. This format thus eliminates potential classification problems. 9 LEARNING OBJECTIVE 3 Discuss how to report various income items. Companies are generally allowed flexibility in the presentation of the components of income. However, the FASB developed specific guidelines in two important areas: what to include in income and how to report certain unusual or infrequent items. What should be reported in net income and where it should be reported is controversial. For example, should companies report a gain or loss on sale of an investment as part of net income or report it directly in retained earnings? Should a company report a loss on discon- tinued operations differently than interest expense? What we therefore need is consistent and comparable income reporting practices. Developing a framework for reporting income components is important to ensure useful information. Furthermore, as our opening story discusses, we need consistent and comparable income reporting practices to avoid “promotional” information reported by companies. 10 Some users advo- cate a current operating performance approach to income reporting. These analysts argue that the most useful income measure reflects only regular and recurring revenue and expense elements. Some unusual or infrequent (non-recurring) items do not reflect a company’s future earning power. In contrast, others warn that a focus on operating income potentially misses important information about a company’s performance. Any gain or loss experienced by the company, whether directly or indirectly related to operations, contributes to its long-run profitability. As one analyst notes, “write-offs matter. . . . They speak to the volatility of (past) earnings.” 11 As a result, analysts can use some nonoperating items to assess the riskiness of future earnings.

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