Income statement Totally Explained

Everything about Income Statement totally explained

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.
Charitable organizations that are required to publish financial statements don't produce an income statement. Instead, they produce a similar statement that reflects the fact that the charity isn't operating to make a profit.

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 capability of generating future cash flows.
However, information of an income statement has several limitations:

The items that might be relevant but can't be reliably measured are not reported (for example brand recognition and loyalty).
Some numbers depend on accounting methods used (for example using FIFO or LIFO accounting to measure inventory level).
Some numbers depend on judgments and estimates (for example 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 $ $ Revenues:
GROSS PROFIT (including rental income) 496,397

Expenses: ADVERTISING 6,300 INSURANCE 750 LEGAL & PROFESSIONAL SERVICES 1,575 RENT 13,000 UTILITIES 491 PRINTING, POSTAGE & STATIONERY 320 ENTERTAINMENT 5,550 LICENSES 632 BANK & CREDIT CARD FEES 144 BOOKKEEPING 3,350 EMPLOYEES 88,000 RENTAL MORTGAGES AND FEES 74,400

TOTAL EXPENSES (194,512)

NET INCOME 301,885 ========

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. 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 (for example, sales salaries, commissions and travel expenses, advertising, freight, shipping, depreciation of sales store buildings and equipment)
R & D expenses - represent expenses included in research and development
Depreciation - is the charge for a specific period (for example 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 (for example rent, patents). It also includes unusual gains and losses that are either unusual or infrequent, but not both (for example 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 (for example frost damage wouldn't 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 (for example estimated useful life of a fixed asset) don't 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.

ext

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

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 profit that's calculated after subtracting the expenses from revenue. Since this forms the last line of the income statement, it's generally referred to as the bottom line. It is important to investors as it represents the profit for the year attributable to the shareholders.

Further Information

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