Income Statement Overview (17.1) Flashcards
Describe the income statement
The income statement reports the revenues and expenses of the firm over a period of time.
The income statement is sometimes referred to as the statement of operations, the statement of earnings, or the profit and loss statement (P&L)
Income statement equation
revenues − expenses = net income
or, a more detailed version would be:
net income = revenues − ordinary expenses + other income − other expense + gains − losses
Describe revenues
Revenues are the amounts reported from the sale of goods and services in the normal course of business.
Describe net revenue
Revenue less adjustments for estimated returns and allowances is known as net revenue
describe expenses
Expenses are the amounts incurred to generate revenue and include cost of goods sold, operating expenses, interest, and taxes.
Expenses are grouped together by their nature or function. *Note: Grouping expenses by function is sometimes referred to as the cost of sales method.
Describe how expenses are grouped by nature or function
Presenting all depreciation expense from manufacturing and administration together in one line of the income statement is an example of grouping by nature of the expense.
Combining all costs associated with manufacturing (e.g., raw materials, depreciation, labor, etc.) as cost of goods sold is an example of grouping by function.
describe gains and losses on the income statement
Gains and losses may or may not result from ordinary business activities.
Typically arise on the disposal of long lived assets.
Are the income statements separate or consolidated when a firm has a controlling interest in a subsidiary?
the statements of the two firms are consolidated; the earnings of both firms are included on the income statement.
the share (proportion) of the subsidiary’s income not owned by the parent is reported in parent’s income statement as the noncontrolling interest (also known as minority interest or minority owners’ interest). The noncontrolling interest is subtracted from the consolidated total income to get the net income of the parent company.
What are the 2 Income statement presentation formats
A firm can present its income statement using a single-step or multi-step format.
Describe the single-step format of an income statement
All revenues are grouped together and all expenses are grouped together.
Describe the multi-step format of an income statement
includes gross profit, revenues minus cost of goods sold.
What is gross profit
Gross profit is the amount that remains after the direct costs of producing a product or service are subtracted from revenue.
Revenue - COGS
what is operating profit (aka operating income)
Subtracting operating expenses, such as selling, general, and administrative expenses, from gross profit gives operating profit.
Revenue - COGS - Operating costs
Is interest expense an operating cost?
For nonfinancial firms, operating profit is profit before financing costs, income taxes, and non-operating items are considered.
Interest expense is usually considered an operating expense for financial firms.
What figure is often used as a substitute for operating income in analysis?
Although there may be some differences between operating income and earnings before interest and taxes (EBIT), we often use EBIT as a proxy for operating income in analysis.
