3-1 Income Statements Flashcards
Income Statement
Reports revenues, gains, expenses, and losses of a company for a specific TIME PERIOD
What is the primary source of information on a company’s current operating peformance?
Income Statement
What are other names of the Income Statement?
Statement of Income
Statement of Earnings
Statement of Operations
Profit and Loss Statement
Income from Continuing Operations
Specifies the revenues, gains, expenses, and losses associated with the parts of a company that are expected to continue in the future (after taxes)
Income (loss) from Discontinued Operations
Operations that have been disposed of or are held for sale (reported in a separate section)
Performance Evaluation
Income components are used to assess a company’s performance relative to prior results, expectations, industry and competitior results
Future Earning Prediction
The income statement provides a basis for predicting future results, with special emphasis on differentiating recurring and nonrecurring amounts
Risk Assessment
Income results provide a basis for a financial statement user to assess risk about predicting future financial results
What are some factors that limit financial statement users?
Estimates and Judgement
Selection of Accounting Methods
Other Sources of Information
Estimates and Judgement
Measurement in financial statements commonly involve estimates, classifications, summarizations, judgements, and allocations
Selection of Accounting Methods
Income components are impacted by accounting methods used. Explanations of underlying assumptions or methods better enable one to compare results across companies
Other Sources of Information
Financial statement users must rely on additional information in analyzing financial statements such as economic indicators and analyst expectations. Also, some items are omitted from the income statement because they cannot be reliably measured, such as internally generated goodwill and investments in human capital
Real world: Ralph Lauren vs. U.S. Bancorp
Interest expense, Interest and other income, net are classified as nonoperating for Ralph Lauren, but are listed first on the Bancorp Income Statement because it is considered part of the company’s primary operation
Operating Items
Revenues and Expenses of a company’s primary or major operations
Revenues
Sales (the main source of revenue) - reported net of discounts, returns, and allowances
Expenses
Cost of Goods Sold
Selling Expenses
General and Administrative Expenses
Other Operating Expenses
Cost of Goods Sold
Direct cost of goods sold in generating revenues
Selling Expenses
Expenses incurred by the company in its efforts to generate revenues
(Marketing Expense, Delivery Expense, Promotional Materials Expense, Vehicle Expense, Advertising Expense, Sales Salaries Expense)
General and Administrative Expenses
Expenses incurred by the company to maintain is operations that are not directly related to production of goods and services
(Administrative Salaries and Benefit, Bonus Expense, Insurance Expense, Depreciation on Corporate Office, Legal Expense, Utilities Expense)
Other Operating Expenses
Items management feels are important to identify separately such as Recurring Costs, Research and Development Costs, and Amortization of Intangible Assets
Nonoperating Items
Revenue and expense items that are not components of the company’s primary operations but are related to secondary or auxiliary activities
Gains and losses or changes in equity resulting from peripheral transactions of an entity
Other Revenues and Gains
Interest Revenue, Royalty Revenue, Dividend Revenue, Gains from the Sale of Investments
Other Expenses and Losses
Interest Expense, Litigation Losses, and Losses from the Sale of Investments
Income Tax
Portion of state and federal income tax expenses applicable to income from continuing operations
What are the two formats for an income statement?
Multi-Step Format
or Single-Step Format
Multi-Step Format
Distinguishes among various operations and activities that affect income
(Operating and nonoperating items are separated)
Gross Profit/Gross Margin
Sales revenue less cost of goods sold
Operating Income/Income from Operations
Operating revenues less operating expenses
Single-Step Format
Uses only two broad classifications:
1. Revenues and gains
2. Expenses and losses
(no priority in reporting one revenue/expense item over another)
