Income Statement Flashcards
What is another name for the income statement?
Statement of income, Statement of operations, Statement of earnings, Profit and loss (P&L) statement, Consolidated statement of income
These terms are often used interchangeably in financial reporting.
What does the income statement report?
Revenues, expenses, gains, losses, and net income
This information is for the accounting period indicated in the statement’s heading.
What are typical periods covered by an income statement?
- Year ended December 31, 2023
- Year ended June 30, 2023
- Nine months ended September 30, 2023
- Three months ended March 31, 2023
- Month ended August 31, 2023
- 52/53 weeks ended February 1, 2023
These periods can vary depending on the reporting needs of the business.
What is operating revenue?
Amounts earned from the company’s main business activities
Common examples include net sales for retailers or service fees for service providers.
What are operating expenses?
Expenses associated with the company’s main business activities
Common types include cost of sales, cost of services, and selling, general and administrative expenses.
How is operating income calculated?
Operating income = Operating revenues - Operating expenses
This figure reflects the profitability from core business operations.
What are nonoperating revenues or expenses?
Revenues or expenses resulting from activities outside of the company’s main business activities
Examples include investment income and interest expense.
What does ‘income before income tax expense’ represent?
The sum of operating income and nonoperating amounts
This figure indicates profit before tax liabilities are deducted.
What is net income?
Earnings remaining after subtracting income tax expense
This is a key indicator of a company’s profitability.
What does the accrual method of accounting entail?
Revenues are recognized when earned, not when cash is received
This is different from the cash basis of accounting.
What is a gain in the context of an income statement?
Reported when a company sells a long-term asset for more than its book value
For example, selling an asset for $10,000 when its book value is $6,000 results in a $4,000 gain.
What is a loss in the context of an income statement?
Reported when a company sells a long-term asset for less than its book value
For example, selling an asset for $5,000 when its book value is $6,000 results in a $1,000 loss.
What does the income statement not report?
The company’s cash receipts and disbursements
This information is found in the statement of cash flows.
What is a comparative income statement?
Displays three columns of amounts to show two years of previous income statement amounts
This provides context for the most recent year’s performance.
What is net sales?
Sales of goods minus returns, allowances, and discounts
It is typically the first amount shown on the income statement for product-selling companies.
What is the cost of sales (cost of goods sold)?
The company’s cost for the products sold during the specified period
This is often the largest operating expense for companies selling goods.
How is gross profit calculated?
Gross profit = Net sales - Cost of sales
This figure indicates the profitability before accounting for other expenses.
What are selling, general and administrative expenses (SG&A)?
Expenses that are not directly tied to production but necessary to operate the business
These include salaries, advertising, and office rent.
What is the significance of the heading of the income statement?
It includes the name of the company, the name of the statement, and the reporting period
This informs readers about the context of the financial data.
What is the purpose of notes to the financial statements?
To provide important information that cannot be adequately communicated by the amounts shown
These notes are essential for understanding the complexities of the business.
True or False: The income statement is one of a set of five financial statements.
True
The five statements include the income statement, statement of comprehensive income, balance sheet, statement of stockholders’ equity, and statement of cash flows.
What is required for a company to be profitable?
Gross profit must be greater than selling, general and administrative expenses and nonoperating items.
What does gross margin refer to?
Gross profit percentage, calculated as gross profit divided by net sales.
What was the gross profit percentage for Example Corporation in 2023?
22.1%
What are selling, general and administrative expenses commonly referred to as?
SG&A.
What expenses are included in SG&A for a retailer?
Salaries, wages, rents, utilities, depreciation, advertising, insurance, and other primary activity expenses.
What is the formula for operating income?
Operating income = operating revenues – operating expenses.
What are the operating revenues for Example Corporation?
Net sales.
What are operating expenses for retailers and manufacturers?
Cost of sales and SG&A expenses.
True or False: Interest expense is considered an operating expense for most businesses.
False.
What is recorded as a loss on the sale of equipment?
The difference when cash received is less than the asset’s book value.
What does income before income taxes represent?
Operating income adjusted for nonoperating revenues and expenses.
What must regular corporations report on their income statement?
The amount of income tax expense associated with the income statement items.
What does net income represent?
The bottom line after subtracting income tax expense from income before income taxes.
How does net income affect stockholders’ equity?
It increases retained earnings.
What are the two major components of the statement of comprehensive income?
- Net income (or net loss) from the income statement
- Other comprehensive income.
What items commonly appear as other comprehensive income?
- Foreign currency adjustments
- Unrealized gains/losses on pension plans
- Unrealized gains/losses on hedging derivatives.
How does other comprehensive income affect stockholders’ equity?
It increases or decreases accumulated other comprehensive income.
Fill in the blank: Owner’s compensation does not appear on a ______ income statement.
sole proprietorship.
What is the historical cost principle?
Income statement amounts are based on historical amounts at the time of the original transaction.
What types of costs are not shown in the income statement?
- Costs of making additional units
- Opportunity costs.
What is the opportunity cost of not producing additional loaves of bread?
The potential additional revenues missed.
True or False: The internal income statements can differ from those required by US GAAP.
True.
What is included in internal income statements for detailed monitoring?
Schedules of expenses for specific departments.
What is the purpose of internal income statements?
To provide detailed financial information for internal management, differing from external reporting standards
What is SG&A in the context of internal income statements?
Selling, General and Administrative expenses
How can internal income statements help department managers?
By allowing them to monitor their specific expenses without distraction from other departments’ expenses
What is a contribution margin?
The amount of net sales remaining after deducting variable costs and expenses
Fill in the blank: Contribution margin = sales – all ______ costs and variable expenses.
variable
What is the format used to emphasize the contribution margin in an internal income statement?
Contribution Margin Format
What are some examples of major segments for which income statements can be prepared?
- Consumer products division
- Industrial products division
In the example provided, what is the total net sales for Product Line 1?
$70,000
What fixed expenses are subtracted after calculating the contribution margin?
Fixed costs and fixed expenses directly traceable to each product line
True or False: Common expenses decrease when a product line is eliminated.
False
What does the contribution margin format allow executives to see?
The relative profitability of products or segments and how profits change with volume changes
Why is it important to consult with accounting and tax professionals?
To navigate complexities in financial statement reporting and income tax reporting
