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Comparative Income Statement Analysis

Income Statement Assignment / Homework Help
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.

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.

For the year ended 31 December 2009
Sales $25,000
Rental income $15,000
Interest income $10,000
Total revenues $50,000

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.

For the year ended 31 December 2009
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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