Key Rules INCOME Statement

Question 1

Income statement lists

Answer 1

Revenue, expenses and taxes.

With after-tax profit at the very bottom over a period of time

Question 2

To appear on the income statement, each item must meet:

Answer 2

1. Correspond must to period shown on income statement only
2. Must affect company’s taxes

Question 3

Revenue and COGS

Answer 3

Revenue = value of sales
COGS = expenses directly linked to the sale of those products/ services

Question 4

Operating expenses

Answer 4

Items not directly linked to product sales, salaries, rent, RnD, etc.
- as well as non cash expenses like depreciation and amortisation

Question 5

Other income and expenses

Answer 5

In between operating income and pre-tax income

Items not related to firm’s main operating activities.

Question 6

Taxes and net income

Answer 6

At the end, net income is given after the after tax profits.

Net income = revenue - expenses - taxes

Question 7

Define amortisation

Answer 7

Amortization is the process of spreading the cost of an intangible asset over its useful life and recording it as an expense on the income statement.

E.g. £100k tech innovation used for 10 years means £10k amortisation cost yearly

Question 8

Key points

Answer 8

• do not need to be related to a company’s operational activities
• do not need to be cash expenses

Question 9

How would an income statement look

Answer 9

Product sales
COGS
= gross profit
Overhead expenses
= Operating profit
Interest expense
Tax expense
= net profit

Question 10

How to make an income statement

Answer 10

To make an income statement
- Need a trial balance (adjusted)
- Focus on revenue and expenses.
- Calculate gross profit
- Account for indirect operating costs, or known as overhead expenses, to find operating profit
Then account for indirect non-operating costs, leaving us with net profit