An Income Statement, also called a Profit and Loss Statement (P&L), is a financial statement for companies that indicates how Revenue (money received from the sale of products and services before expenses are taken out, also known as the "top line") is transformed into net income (the result after all revenues and expenses have been accounted for, also known as the "bottom line"). The purpose of the income statement is to show managers and investors whether the company made or lost money during the period being reported. In reference to charitable organizations, an income statement is called a Statement of Activities and Changes in Net Assets.
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Usefulness and limitations of income statement
Income statements should help investors and creditors determine the past performance of the enterprise; predict future performance; and assess the risk of achieving future cash flows. However, information in 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
Single-step income statement
In the single-step statement, just two groups exist: revenues and expenses. Expenses are deducted from revenues to get net income (single step). Its main advantage is simplicity, but more and more companies choose multiple-step statements. The basic format is shown below.
(Atlas Mortgage Funding, LLC)
- INCOME & EXPENSE STATEMENT -
For the month ended DECEMBER 31, 2005
Revenues:
GROSS PROFIT $258,788.00
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Expenses:
ADVERTISING $ 22,967.00
INSURANCE 6,765.00
LEGAL & PROFESSIONAL SERVICES 725.00
OFFICE EXPENSES 33,557.00
OTHER BUSINESS PROPERTY 12,860.00
OFFICE SUPPLIES 14,212.00
TRAVEL 6,161.00
DEDUCTIBLE MEALS & ENTERTAINMENT 4,921.00
UTILITIES 8,698.00
TOLLS 535.00
MILEAGE (22,000 x .405) 8,910.00
MISC. EXPENSES 651.00
LAUNDRY & LINENS 502.00
ENTERTAINMENT 124.00
LICENSES 5,234.00
PROMOTIONAL 2,397.00
BANK & CREDIT CARD FEES 2,180.00
TITLES & FEES 5,854.00
BOOKKEEPING 540.00
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Total Expenses $137,793.00
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NET INCOME $120,995.00
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Items on income statement
Operating section
- Net Revenue - Inflows or other enhancements of assets of an entity or settlements of its liabilities during a period from delivering or producing goods, rendering services, or other activities that constitute the entity's ongoing major or central operations. Usually presented as sales minus sales discounts, returns, and allowances.
- Expenses - 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 or central operations.
- Cost of goods sold - represents the amount a product costs to produce
- 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, stationery, supplies)
- Selling expenses - represent expenses needed to sell products (e.g., sales salaries and commissions, advertising, freight, shipping, depreciation of sales equipment)
- R & D expenses - represent expenses included in research and development
- Depreciation - represents costs associated with depreciated assets
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 won't happen next year. 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 nature 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, changing method of computing depreciation from straight-line to sum-of-the-years'-digits. 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. <math>Earnings\ per\ share = \frac{net\ income - preferred\ stock\ dividends}{weighted\ average\ of\ common\ stock\ shares\ outstanding}</math> 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, convertible bonds, and other securities that could be transformed into shares are transformed. This way number of shares increases and EPS decreases. Diluted EPS is considered to be a more accurate way to measure EPS.
ABC Investments, Inc.
STATEMENTS OF INCOME
Revenues $10,584.2 $ 9,903.4 $ 9,294.3
Cost of sales 4,747.2 4,456.1 4,224.2
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Gross profit 5,837.0 5,447.3 5,070.1
Selling, general and administrative
expenses 3,624.6 3,296.3 3,034.0
Other (income) expense, net 90.3 (15.0) 23.0
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Operating profit 2,122.1 2,166.0 2,013.1
Interest expense, net 119.7 124.1 142.8
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Income before income taxes 2,002.4 2,041.9 1,870.3
Provision for income taxes 680.3 620.6 582.0
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Net income $ 1,322.1 $ 1,421.3 $ 1,288.3
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Complex example: Viacom, Inc. income statement
VIACOM INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In millions, except per share amounts)
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Year Ended December 31, 2004 2003 2002
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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 — —
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Total expenses 35,494.9 16,354.0 14,945.9
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Operating income (loss) (12,969.0) 4,473.6 4,240.9
Interest expense (718.9) (742.9) (799.1)
Interest income 25.3 11.7 12.0
Other items, net 7.6 (3.0) (32.9)
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Earnings (loss) from continuing operations before
income taxes, equity in earnings (loss) of affiliated
companies and minority interest (13,655.0) 3,739.4 3,420.9
Provision for income taxes (1,378.6) (1,497.0) (1,338.3)
Equity in earnings (loss) of affiliated companies,
net of tax (20.8) .1 (37.3)
Minority interest, net of tax (5.1) (4.7) (3.3)
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Net earnings (loss) from continuing operations (15,059.5) 2,237.8 2,042.0
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Discontinued operations (Note 2):
Earnings (loss) from discontinued operations (1,182.7) (718.8) 255.3
Income taxes, net of minority interest 92.4 (83.6) (90.7)
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Net earnings (loss) from discontinued operations (1,090.3) (802.4) 164.6
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Net earnings (loss) before cumulative effect of
accounting change (16,149.8) 1,435.4 2,206.6
Cumulative effect of accounting change, net of minority
interest and tax (Note 1) (1,312.4) (18.5) (1,480.9)
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Net earnings (loss) $ (17,462.2) $ 1,416.9 $ 725.7
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Basic earnings (loss) per common share:
Net earnings (loss) from continuing operations $ (8.78) $ 1.28 $1.16
Net earnings (loss) from discontinued operations $ (.64) $ (.46) $ .09
Net earnings (loss) before cumulative effect of
accounting change $ (9.42) $ .82 $ 1.26
Cumulative effect of accounting change $ (.77) $ (.01) $ (.84)
Net earnings (loss) $(10.19) $ .81 $ .41
Diluted earnings (loss) per common share:
Net earnings (loss) from continuing operations $ (8.78) $ 1.27 $ 1.15
Net earnings (loss) from discontinued operations $ (.64) $ (.46) $ .09
Net earnings (loss) before cumulative effect of
accounting change $ (9.42) $ .82 $ 1.24
Cumulative effect of accounting change $ (.77) $ (.01) $ (.83)
Net earnings (loss) $(10.19) $ .80 $ .41
Weighted average number of common shares outstanding:
Basic 1,714.4 1,744.0 1,752.8
Diluted 1,714.4 1,760.7 1,774.8
Dividends per common share $ - $ .25 $ .12
Top line
The term "top line" refers to the total revenues or sales mentioned in the income statement. This refers to the fact that the total revenues collected by a company appears at the top of the income statement.
Bottom line
"Bottom line" is the net income that is calculated after subtracting the expenses from revenue. Since this forms the last line of the income statement, it is generally referred to as the bottom line.
See also
External links
- Income Statement Explanation with examples.
- Understanding Income Statements
- Understanding The Income Statement Article from Investopedia
