Income statement , also referred as profit and loss statement (P&L) , earnings statement , operating statement or statement of operations , is a company's financial statement that indicates how the revenue (money received from the sale of products and services before expenses are taken out, also known as the "top line") is transformed into the net income (the result after all revenues and expenses have been accounted for, also known as the "bottom line"). It displays the revenues recognized for a specific period, and the cost and expenses charged against these revenues, including write-offs (e.g., depreciation and amortization of various assets) and taxes. The purpose of the income statement is to show managers and investors whether the company made or lost money during the period being reported.
The important thing to remember about an income statement is that it represents a period of time. This contrasts with the balance sheet, which represents a single moment in time.
Charitable organizations that are required to publish financial statements do not produce an income statement. Instead, they produce a similar statement that reflects funding sources compared against program expenses, administrative costs, and other operating commitments. This statement is commonly referred to as the statement of activities. Revenues and expenses are further categorized in the statement of activities by the donor restrictions on the funds received and expended.
The income statement can be prepared in one of two methods. The Single Step income statement takes a simpler approach, totaling revenues and subtracting expenses to find the bottom line. The more complex Multi-Step income statement (as the name implies) takes several steps to find the bottom line, starting with the gross profit. It then calculates operating expenses and, when deducted from the gross profit, yields income from operations. Adding to income from operations is the difference of other revenues and other expenses. When combined with income from operations, this yields income before taxes. The final step is to deduct taxes, which finally produces the net income for the period measured.
Usefulness and limitations of income statement
Income statements should help investors and creditors determine the past financial performance of the enterprise, predict future performance, and assess the capability of generating future cash flows through report of the income and expenses.
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).
See also: Creative accounting
- INCOME STATEMENT BOND LLC - For the year ended DECEMBER 31 2007 $ $ Debit CreditRevenuesGROSS PROFIT (including rental income) 496,397 --------Expenses: ADVERTISING 6,300 BANK & CREDIT CARD FEES 144 BOOKKEEPING 3,350 EMPLOYEES 88,000 ENTERTAINMENT 5,550 INSURANCE 750 LEGAL & PROFESSIONAL SERVICES 1,575 LICENSES 632 PRINTING, POSTAGE & STATIONERY 320 RENT 13,000 RENTAL MORTGAGES AND FEES 74,400 TELEPHONE 1,000 UTILITIES 491 -------- TOTAL EXPENSES (195,512) --------NET INCOME 300,885 ========Items on income statement
Operating section
- Revenue - Cash inflows or other enhancements of assets 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.
- Expenses - Cash outflows or other using-up of assets or incurrence of liabilities during a period from delivering or producing goods, rendering services, or carrying out other activities that constitute the entity's ongoing major operations.
- General and administrative expenses (G & A) - represent expenses to manage the business (officer salaries, legal and professional fees, utilities, insurance, depreciation of office building and equipment, office rents, office supplies)
- Selling expenses - represent expenses needed to sell products ( e.g. , sales salaries, commissions and travel expenses, advertising, freight, shipping, depreciation of sales store buildings and equipment)
- Selling General and Administrative expenses (SG&A or SGA) - consist of the combined payroll costs (salaries, commissions, and travel expenses of executives, sales people and employees), and advertising expenses a company incurs. SGA is usually understood as a major portion of non-production related costs, opposing production related costs such as raw material and (direct) labour
- R & D expenses - represent expenses included in research and development
- Depreciation - is the charge for a specific period ( i.e. year, accounting period) with respect to fixed assets that have been capitalised on the balance sheet.
Non-operating section
- Other revenues or gains - revenues and gains from other than primary business activities (e.g. rent, patents). It also includes unusual gains and losses that are either unusual or infrequent, but not both (e.g. sale of securities or fixed assets)
- Other expenses or losses - expenses or losses not related to primary business operations.
Irregular items
They are reported separately because this way users can better predict future cash flows - irregular items most likely will not recur. These are reported net of taxes.
- Discontinued operations is the most common type of irregular items. Shifting business location, stopping production temporarily, or changes due to technological improvement do not qualify as discontinued operations.
- 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).
- Changes in accounting principle is, for example, deciding to depreciate an investment property that has previously not been depreciated. However, changes in estimates (e.g. estimated useful life of a fixed asset) do not qualify.
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.
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.
24/7 Family Fitness and Fun STATEMENTS OF INCOME Revenues $12,580.2 $ 10,900.4 $ 8,290.3 Cost of sales 6,740.2 5,650.1 4,524.2 ------------------------------------------------------------------------------ Gross profit 6,835.0 5,657.3 3,270.1 Selling, general and administrative expenses 3,624.6 3,296.3 3,034.0 Other (income) expense, net 1,100.3 (20.0) 18.0 ------------------------------------------------------------------------------ Operating profit 2,122.1 2,166.0 2,013.1 Interest expense, net 119.7 124.1 142.8 ------------------------------------------------------------------------------ Income before income taxes 2,102.4 1,980.9 1,870.3 Provision for income taxes 680.3 620.6 582.0 ------------------------------------------------------------------------------ Net income $ 1,720.1 $ 1,421.3 $ 1,190.3 ------------------------------------------------------------------------------
VIACOM INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (In millions)---------------------------------------------------------------------------------------------- Year Ended December 31, 2004 2003 2002---------------------------------------------------------------------------------------------- Revenues $ 22,525.9 $ 20,827.6 $19,186.8 Expenses: Operating 12,545.8 11,879.8 10,735.5 Selling, general and administrative 4,142.1 3,732.3 3,498.6 Depreciation and amortization 809.9 741.9 711.8 Impairment charge (Note 3) 17,997.1 — — ---------------------------------------------------------------------------------------------- Total expenses 35,494.9 16,354.0 14,945.9 ---------------------------------------------------------------------------------------------- Operating income (loss) (12,969.0) 4,473.6
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