Income statement
From Wikipedia, the free encyclopedia
Income statements is a financial statement for companies that indicates how net 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.
Also called Profit and Loss Statement (P&L) outside the USA or Statement of Activities and Changes in Net Assets in reference to charitable organizations.
[edit] 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
[edit] 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.
Equity
Net sales ____________________$3,400,000
Rent revenue _________________ 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 _____________ $4.20
Based on 100,000 shares.
The basic sections are shown below.
PROFIT AND LOSS SEPT 2006
Net Revenue 13,812
- Cost of Sales (or Cost of Goods Sold) 10,825
= Gross Margin or Profit 2,987
- Selling Expenses 530
- General and Administrative Expenses 1,335
= Operating Profit 1,122
- Interest Expense 0
- Other Expenses or Losses 0
= Earnings Before Taxes 1,122
- Taxes 392
= Earnings Before Irregular Items 720
-/+ Changes in Accounting Principle
= Net Income 1,122
Earnings Per Share
[edit] Items on income statement
[edit] 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
[edit] 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.
[edit] 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.
[edit] 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, 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.
[edit] Alternative setup of multiple-step income statement
Setups of income statements come in many shapes and forms. Below is an alternative definition which carries a direct relationship to terminology commonly used in financial analysis. On the right hand side of the table several alternative suggestions for terminology are listed - economics and accounting is by no means a discipline with a single standard definition of terms used. Hence, part of the skill in understanding income statements and balance sheets is to see through the words.
Income statement item Acronym spelled out Alternative terminology Revenues Sales, Income, Turnover -CoGS Cost of Goods Sold Cost of sales -------------------------------------------------------------------------------------------------- EBITDA Earnings before I+T+D+A Gross margin, Gross profit, Operating margin - Depreciation - Amortization -------------------------------------------------------------------------------------------------- EBIT Earnings before I+T Financial items, Financial income, - Financial expense -------------------------------------------------------------------------------------------------- EBT Earnings before Taxes Pretax net income - Taxes -------------------------------------------------------------------------------------------------- E Earnings Net income
[edit] Simple example: Colgate-Palmolive income statement
COLGATE-PALMOLIVE COMPANY
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in Millions Except Per Share Amounts)
$ 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 $ 1,327.1 $ 1,421.3 $ 1,288.3
------------------------------------------------------------------------------
Earnings per common share, basic $ 2.45 $ 2.60 $ 2.33
Earnings per common share, diluted $ 2.33 $ 2.46 $ 2.19
[edit] 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
[edit] 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.
[edit] Bottom line
The "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.
[edit] See also
[edit] External links
- Income Statement Explanation with examples.
- Understanding Income Statements
- Understanding The Income Statement Article from Investopedia
