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Also called Profit and Loss Account ('''P&L''') or in reference to charitable organizations '''Income and Expenditure Account'''.


USEFULNESS AND LIMITATIONS OF INCOME STATEMENT

Income statement should help investors and creditors:
  • evaluate the past performance of the enterprise

  • predict future performance

  • 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.

Revenues
Net sales Insert formula here126,850____________________$3,400,000
Rent revenue Insert formula here11,712_________________ 40,000
Interest revenue _____________ 12,000
Total revenue _____________ 3,452,000

Expenses (usually sorted by amount)
Cost of goods sold ___________ 2,000,000
Selling expenses _____________ 450,000
Administrative expenses ______ 350,000
Interest expense _____________ 45,000
Total expense _____________ 2,845,000

Income before taxes ____________ 607,000
Income taxes ___________________ 182,100
Net income _____________________ 424,900

Earnings Per Share _____________ $4.25


MULTIPLE-STEP INCOME STATEMENT

It is argued that multiple-step income statement provides more useful information because it separates operating and non-operating activities and classifies expenses by function. It allows instant comparisons and ratio computations which evaluate performance of the company. The basic sections are shown below.
__
  '''Gross Margin or Profit'''
  '''Operating Profit''' __