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In reference to charitable organizations, an income statement is called a Statement of Activities and Changes in Net Assets.


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.

(Name of the Company)
- INCOME STATEMENT -
For the month ended June 30, 2007

Revenues:
Fees Earned $178,135

Expenses:
Payroll Expenses $ 42,358
Office Supplies 5,172
Utilities Expenses 13,576
Advertising Expense 14,391
Insurance/License Expense 5,228
Office Operations(Rent,etc) 18,488
Printing/Shipping 1,025

Total Expenses 100,238

NET INCOME $ 77,897





ITEMS ON INCOME STATEMENT


Operating section

  • Net Revenue - Inflows or other enhancements of Asset s 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.

Earnings\ per\ share = rac{net\ income - preferred\ stock\ dividends}{weighted\ average\ of\ common\ stock\ shares\ outstanding}

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 Invetsments, 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
--
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
--
Operating profit 2,122.1 2,166.0 2,013.1
Interest expense, net 119.7 124.1 142.8
--
Income before income taxes 2,002.4 2,041.9 1,870.3
Provision for income taxes 680.3 620.6 582.0
--
Net income $ 1,322.1 $ 1,421.3 $ 1,288.3
--


COMPLEX EXAMPLE: VIACOM, INC. INCOME STATEMENT


VIACOM INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In millions, except per share amounts)
--
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 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)
--
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)
--
Net earnings (loss) from continuing operations (15,059.5) 2,237.8 2,042.0
--
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)
--
Net earnings (loss) from discontinued operations (1,090.3) (802.4) 164.6
--
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)
--
Net earnings (loss) $ (17,462.2) $ 1,416.9 $ 725.7
--

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



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