Income Statement Flashcards
What is an Income Statement
The income statement shows revenues, expenses, and profit for a period of time. it is also called a profit and loss statement, P&L, statement of earnings, or statement of operations. Sometimes the word consolidated is thrown in front of phrases. The bottom line of the income statement is net profit, also known as net income or net earnings
Revenue
Revenue is a promise to pay for products or services provided. Sales can mean the same thing as revenue.
It is the total dollar amount for goods and services that are credited to an income statement over a particular time period.
A key phrase in the revenue definition is “promise to pay.”
Expenses
Expenses are the costs to create and deliver the products and services to customers.
There are two major categories of expenses that are found in the income statement:
Cost of goods sold (COGS) (also called cost of revenue, product cost, cost of sales (COS)). Cost of goods sold includes all the costs to manufacture the product or deliver the service, such as materials and labor costs to make the product and labor costs to deliver the service.
Selling, general and administrative (SG&A) expenses. These are the costs that an enterprise incurs that can not be assigned directly or indirectly to production. Examples include research and development costs, marketing costs, and support costs.
Income
Income is how much is left over from revenue after all the expenses are paid.
Profit, income, and earnings all mean the same thing.
Operating income (also called EBIT, earnings before interest and taxes) is the income from the operations of the business. It is calculated before non-operational expenses are subtracted (such as interest and taxes).
Net income is the income after all expenses are subtracted, including interest and taxes.
The Matching Principle
The matching principle states, “match the sale with its associated costs to determine profits.”
This means that the income statement shows revenue and the costs associated with producing that revenue, whenever those costs were incurred.
In other words, the expenses on the statement are not necessarily those things that we purchased that period, or even paid for that period.
The matching principle is the driving force behind an accurate and useful income statement.
Remember, the overall goal is for the income statement to reflect the realities of the transactions.
That means that we (and our accountants) must have an understanding of the business reality, rather than making assumptions about general types of transactions.
Purpose of the Income statement
Track key data Analyze profitability - "Above the line" and "below the line" Analyze growth rates: - Revenue - Expenses - Profit
What are Operating Expenses?
Operating expenses are the costs required to keep the business going from day to day. They include salaries, benefits, and insurance costs, among a host of other items. Operating expenses are listed on the income statement and are subtracted from revenue to determine profit
What is an accrual?
An accrual is the portion of a revenue or expense item that is recorded in a particular time span. The purpose of accruals is to match costs to revenues in a given period as accurately as possible
What is depreciation?
Depreciation is the method accountants use to allocate the cost of equipment and other assets to the total cost of products and services as shown on the income statement. It is based on the same idea as accruals: we want to match closely as possible the costs of our products and services with what was sole. Most capital investments other than land are depreciated. Accountants attempt to spread the cost of expenditure over the useful life of the item.
What is Cost of Sales
Cost of sales includes actual product cost, the cost of transportation to the Company’s warehouses, stores and clubs from suppliers, the cost of transportation from the Company’s warehouses to the stores and clubs and the cost of warehousing etc
Costs of Goods Sold (COGS) and Cost of Services (COS)
Cost of goods sold or cost of services is one category of expenses. it includes all the costs directly involved in producing a product or delivering a service.
Above the Line, Below the Line
The “line” generally refers to gross profit. Above that line on the income statement, typically, are sales and COGS or COS. What’s the difference? Items listed above the line tend to vary more (in the short term) than many of those below the line, and so tend to get more marginal attention.
What is a non-cash expense?
A non-cash expense is one that is charged to a period in the income statement but it not actually paid out in cash. An example is depreciation: accountants deduct a certain amount each month for depreciation of equipment, but the company isn’t obliged to pay out that amount, because the equipment was acquired in a previous period
Profit
Profit is the amount left over after expenses are subtracted from revenue. There are three basic types of profit: gross profit, operating profit, and net profit
Gross Profit
Gross profit is sales minus cost of goods sold or costs of services. It is what is left over after a company has paid the direct costs incurred in making the product or delivering the service. Gross profit must be sufficient to cover a business’s operating expenses, taxes, finance costs and net profit.
Note, gross profit can be greatly affected by decisions about when to recognize revenue and by decisions about what to include in COGS
