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Income Statements
Meaning:
Income Statement, also known as Profit and Loss Statement (P&L Statement), is a
component of the Financial Statements that is prepared to measure the financial
performance of an enterprise for a particular period. The purpose of any business
is to earn profits. In the course of its activities, a business earns revenues and
incurs expenditures. Income statement is prepared to capture this information and
arrive at the resultant profit. The information in the income statement is always
for a particular period, say for a year or a quarter. The income statement discloses
net profit of the business after adjusting from the income earned during the period,
all the expenditures incurred during that period. The various items of income and
expenditure which arouse during the accounting period are detailed out therein and
grouped under significant heads.
Objective:
The main objective of the income statement is to determine whether the enterprise
earned a profit or incurred losses from its activities during the period covered
by the statement. An incidental objective is also to assess the future performance
of the enterprise (on the basis of past performance).
Types of income statement:
The income statement can be prepared in two types; Single Step Income Statement
and Multi-step Income Statement.
In a Single Step Income Statement, all the revenues and expenses are totaled together and their difference found to arrive at the net income. This is a very simple form or approach of preparing the income statement.
In a Single Step Income Statement, all the revenues and expenses are totaled together and their difference found to arrive at the net income. This is a very simple form or approach of preparing the income statement.
INCOME STATEMENT
For the year ended 31 December 2009
For the year ended 31 December 2009
| Revenues: | |
| Sales | $25,000 |
| Rental income | $15,000 |
| Interest income | $10,000 |
| Total revenues | $50,000 |
| Expenses: | |
| Cost of goods sold | $15,000 |
| Printing and postage | $3,000 |
| Advertising | $4,000 |
| Legal and professional fees | $5,000 |
| Interest expense | $13,000 |
| Taxes | $3,000 |
| Total expenses | $42,000 |
| Net income | $ 8,000 |
The multi-step income statement is more detailed and analyses the profits of an
enterprise into gross profit, operating profit, pre-tax profit and post-tax profit
or net income/profit. Typically, cost of goods sold is deducted from sales to arrive
at the gross profit. Operating expenses are then subtracted from gross profit to
compute operating profit or income from operations. Miscellaneous incomes and expenses
including interest are clubbed to the income from operations to arrive at the pre-tax
profit. Deducting taxes from pre-tax profits yields the net income or profit for
the enterprise.
INCOME STATEMENT
For the year ended 31 December 2009
For the year ended 31 December 2009
| Revenues: | |
| Sales | $25,000 |
| Less: Cost of goods sold | $15,000 |
| Gross profit | $10,000 |
| Less: Operating expenses | $12,000 |
| Operating profit | ($2,000) |
| Other income (expenses) (net) | $13,000 |
| Income before income taxes | $11,000 |
| Less: Taxes | $ 3,000 |
| Net income | $ 8,000 |
An income statement can also be presented in a vertical form or horizontal form.
The above examples of income statement are an example of vertical form of presentation.
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