21.1: Income Statement Overview Flashcards
What does an income statement report? What is its equation?
Income statement reports the revenues and expenses of a firm over a period of time.
Equation:
Revenues - expenses = net income
How is income statement presented under US GAAP and IFRS?
Under IFRS and US GAAP, income statements can be presented:
- Separately (income statement and a statement of other comprehensive income)
OR - Together as a single statement of comprehensive income
What is revenue?
Revenues are the amounts reported from the sale of goods and services in the normal course of business.
What is net revenue?
Net revenue is known as revenue less adjustments for estimated returns and allowances.
What is an expense? How are expenses grouped?
Expenses are the amounts incurred to generate revenue.
Amounts incurred:
- Cost of goods sold
- Operating expenses
- Interest
- Taxes
Expenses are grouped together by their nature or function (aka cost of sales method).
- Grouping by nature: ie. presenting all depreciation expense from manufacturing and administration together in one line of the income statement
- Grouping by function: ie. combining all costs with manufacturing as cost of good sold
What are gains and losses?
Gains and losses on the income statement result in an increase (gains) or decrease (loss) of economic benefits.
What is the net income equation?
Net income = revenues - ordinary expenses + other income - other expense + gains - losses
How is the income statement presented for a firm that has a controlling interest in a subsidiary?
When a firm has a controlling interest in a subsidiary, the earnings of both firms are included in the income statement. The portion of the subsidiary’s income not owned by the parent company is reported as noncontrolling interest under the parent’s income statement.
Net income of the parent company = consolidated total income - noncontrolling interest
How are income statements presented?
A firm can present its income statement using a single-step or multi-step format.
In a single-step: all revenues are grouped together and all expenses are grouped together
In a multi-step: includes gross profit, which is revenue minus COGS
How is gross profit calculated on the I/S?
Gross profit = revenue - COGS
How is operating profit calculated on the I/S?
Operating profit
= revenue - COGS - SG&A - depreciation expense
= gross profit - SG&A - depreciation expense
How is income before tax calculated on the I/S?
Income before tax = operating profit - interest expense
How is income from continuing operations calculated on the I/S?
Income from continuing operations = income before tax - provision for income taxes
How does operating profit differ for financial vs nonfinancial firms?
For nonfinancial firms, a company’s operating profits are its normal business activities before making deductions for taxes or interest expense.
For financial firms, interest expense would be included in their operating expenses and would, therefore, be subtracted in arriving at operating profit.
What does “bottom line” refer to?
Bottom line is referred to as the firm’s net income.
