income statement Flashcards
income statement
An income statement is one of the three (along with balance sheet and statement of cash flows) major financial statements that report a company’s financial performance over a specific accounting period.
Net Income
Net Income = (Total Revenue + Gains) – (Total Expenses + Losses)
Total revenue
sum of both operating and non-operating revenues while total expenses include those incurred by primary and secondary activities.
Receipts
Revenue is earned and reported on the income statement. Receipts (cash received or paid out) are not.
Operating Revenue
Revenue realized through primary activities is often referred to as operating revenue. For a company manufacturing a product, or for a wholesaler, distributor or retailer involved in the business of selling that product, the revenue from primary activities refers to revenue achieved from the sale of the product.
Non-Operating Revenue
Revenues realized through secondary, non-core business activities are often referred to as non-operating recurring revenues. These revenues are sourced from the earnings which are outside of the purchase and sale of goods and services and may include income from interest earned on business capital lying in the bank, rental income from business property, income from strategic partnerships like royalty payment receipts or income from an advertisement display placed on business property.
Gains/other income
Also called other income, gains indicate the net money made from other activities, like the sale of long-term assets. These include the net income realized from one-time non-business activities, like a company selling its old transportation van, unused land, or a subsidiary company.
Expenses and Losses
cost for a business to continue operation and turn a profit is known as an expense.
Primary Activity Expenses
All expenses incurred for earning the normal operating revenue are linked to the primary activity of the business. They include the cost of goods sold (COGS), selling, general and administrative expenses (SG&A), depreciation or amortization, and research and development (R&D) expenses. Typical items that make up the list are employee wages, sales commissions, and expenses for utilities like electricity and transportation.
cost of goods sold (COGS)
Cost of goods sold (COGS) refers to the direct costs of producing the goods sold by a company. This amount includes the cost of the materials and labor directly used to create the good. It excludes indirect expenses, such as distribution costs and sales force costs.
COGS=Beginning Inventory+P−Ending Inventory
where
P=Purchases during the period
Selling, General & Administrative Expense (SG&A)
Selling, general and administrative expense (SG&A) is reported on the income statement as the sum of all direct and indirect selling expenses and general and administrative expenses (G & G&A) of a company. SG&A, also known as SGA, includes all the costs not directly tied to making a product or performing a service. SG&A includes the costs to sell and deliver products and services and the costs to manage the company.
Depreciation
Depreciation is an accounting method of allocating the cost of a tangible or physical asset over its useful life or life expectancy. Depreciation represents how much of an asset’s value has been used up. Depreciating assets helps companies earn revenue from an asset while expensing a portion of its cost each year the asset is in use. If not taken into account, it can greatly affect profits.
Amortization
Amortization is an accounting technique used to periodically lower the book value of a loan or an intangible asset over a set period of time. In relation to a loan, amortization focuses on spreading out loan payments over time. When applied to an asset, amortization is similar to depreciation.
The formula to calculate the monthly principal due on an amortized loan is as follows:
Principal Payment = Total Monthly Payment - (Outstanding Loan Balance × (Interest Rate/12 Months))
Typically, the total monthly payment is specified when you take out a loan. However, if you are attempting to estimate or compare monthly payments based on a given set of factors, such as loan amount and interest rate, then you may need to calculate the monthly payment as well. If you need to calculate the total monthly payment for any reason, the formula is as follows:
Total Monthly Payment = Loan Amount [ i (1+i) ÷ n / ((1+i) ÷ n) - 1) ]
Where:
i = monthly interest rate — You’ll need to divide your annual interest rate by 12. For example, if your annual interest rate is 3%, then your monthly interest rate will be 0.0025% (0.03 annual interest rate ÷ 12 months). n = number of payments over the loan’s lifetime — You multiply the number of years in your loan term by 12. For example, a four-year car loan would have 48 payments (four years × 12 months).
Amortization of Intangible Assets
Amortization can also refer to the amortization of intangibles. In this case, amortization is the process of expensing the cost of an intangible asset over the projected life of the asset. It measures the consumption of the value of an intangible asset, such as goodwill, a patent, a trademark, or copyright.1
Amortization is calculated in a similar manner to depreciation—which is used for tangible assets, such as equipment, buildings, vehicles, and other assets subject to physical wear and tear—and depletion, which is used for natural resources. When businesses amortize expenses over time, they help tie the cost of using an asset to the revenues that it generates in the same accounting period, in accordance with generally accepted accounting principles (GAAP). For example, a company benefits from the use of a long-term asset over a number of years. Thus, it writes off the expense incrementally over the useful life of that asset.
The amortization of intangibles is also useful in tax planning. The Internal Revenue Service (IRS) allows taxpayers to take a deduction for certain expenses: geological and geophysical expenses incurred in oil and natural gas exploration, atmospheric pollution control facilities, bond premiums, research and development (R&D), lease acquisition, forestation and reforestation, and intangibles, such as goodwill, patents, copyrights, and trademarks.2
Secondary Activity Expenses
All expenses linked to non-core business activities, like interest paid on loan money.
Losses as Expenses
All expenses that go towards a loss-making sale of long-term assets, one-time or any other unusual costs, or expenses towards lawsuits.
While primary revenue and expenses offer insights into how well the company’s core business is performing, the secondary revenue and expenses account for its involvement and expertise in managing the ad-hoc, non-core activities. Compared to the income from the sale of manufactured goods, a substantially high-interest income from money lying in the bank indicates that the business may not be utilizing the available cash to its full potential by expanding the production capacity or facing challenges increasing its market share amid competition. Recurring rental income gained by hosting billboards at the company factory situated along a highway indicates that the management is capitalizing upon the available resources and assets for additional profitability.
