An Income
Statement, also called a Profit and Loss Statement
(P&L), is a financial statement for companies that indicates
how Revenue (money received from the sale of products
and services before expenses are taken out, also known as the
"top line") is transformed into net income (the result
after all revenues and expenses have been accounted for, also
known as the "bottom line"). The purpose of the income statement
is to show managers and investors whether the company made or
lost money during the period being reported.
Charitable
organizations that are required to publish financial statements
do not produce an income statement. Instead, they produce a
similar statement that reflects the fact that the charity is
not operating to make a profit.
Usefulness
and limitations of income statement
Income statements
should help investors and creditors determine the past performance
of the enterprise, predict future performance, and assess the
capability of generating future cash flows.
However,
information of an income statement has several limitations:
- The items
that might be relevant but cannot be reliably measured are
not reported (e.g. brand recognition and loyalty)
- some
numbers depend on accounting methods used (e.g. using FIFO
or LIFO accounting to measure inventory level)
- some
numbers depend on judgments and estimates (e.g. depreciation
expense depends on estimated useful life and salvage value).
INCOME
STATEMENT BOND LLC - For the year ended DECEMBER 31 2007
$ $
Revenues:
GROSS PROFIT (including rental income) 496,397
--------
Expenses:
ADVERTISING 6,300
INSURANCE 750
LEGAL & PROFESSIONAL SERVICES 1,575
RENT 13,000
UTILITIES 491
PRINTING, POSTAGE & STATIONERY 320
ENTERTAINMENT 5,550
LICENSES 632
BANK & CREDIT CARD FEES 144
BOOKKEEPING 3,350
EMPLOYEES 88,000
RENTAL MORTGAGES AND FEES 74,400
--------
TOTAL EXPENSES (194,512)
--------
NET INCOME 301,885
========
Items
on income statement
Operating
section
- Revenue
- Cash inflows or other enhancements of assets of an entity
during a period from delivering or producing goods, rendering
services, or other activities that constitute the entity's
ongoing major operations. Usually presented as sales minus
sales discounts, returns, and allowances.
- Expenses
- Cash outflows or other using-up of assets or incurrence
of liabilities during a period from delivering or producing
goods, rendering services, or carrying out other activities
that constitute the entity's ongoing major operations.
- General
and administrative expenses (G & A) - represent expenses
to manage the business (officer salaries, legal and professional
fees, utilities, insurance, depreciation of office building
and equipment, stationery, supplies)
- Selling
expenses - represent expenses needed to sell products
(e.g., sales salaries and commissions, advertising, freight,
shipping, depreciation of sales equipment)
- R
& D expenses - represent expenses included in research
and development
- Depreciation
- is the charge for a specific period (i.e. year, accounting
period) with respect to fixed assets that have been capitalised
on the balance sheet. Non-operating
section
- Other
revenues or gains - revenues and gains from other than
primary business activities (e.g. rent, patents). It also
includes unusual gains and losses that are either unusual
or infrequent, but not both (e.g. sale of securities or fixed
assets).
- Other
expenses or losses - expenses or losses not related to
primary business operations.
Irregular
items
They are
reported separately because this way users can better predict
future cash flows - irregular items most likely won't happen
next year. These are reported net of taxes.
- Discontinued
operations is the most common type of irregular items.
Shifting business location, stopping production temporarily,
or changes due to technological improvement do not
qualify as discontinued operations.
- Extraordinary
items are both unusual (abnormal) and infrequent, for
example, unexpected nature disaster, expropriation, prohibitions
under new regulations. Note: natural disaster might not qualify
depending on location (e.g. frost damage would not qualify
in Canada but would in the tropics).
- Changes
in accounting principle is, for example, deciding to depreciate
an investment property that has previously not been depreciated.
However, changes in estimates (e.g. estimated useful life
of a fixed asset) do not qualify.
Earnings
per share
Because
of its importance, earnings per share (EPS) are required to
be disclosed on the face of the income statement. A company
which reports any of the irregular items must also report EPS
for these items either in the statement or in the notes.
There are
two forms of EPS reported:
- Basic:
in this case "weighted average of shares outstanding" includes
only actual stocks outstanding.
- Diluted:
in this case "weighted average of shares outstanding" is calculated
as if all stock options, warrants, convertible bonds, and
other securities that could be transformed into shares are
transformed. This increases the number of shares and so EPS
decreases. Diluted EPS is considered to be a more reliable
way to measure EPS.
24/7
Family Fitness and Fun
STATEMENTS OF INCOME
Revenues $12,580.2 $ 10,900.4 $ 8,290.3
Cost of sales 6,740.2 5,650.1 4,524.2
------------------------------------------------------------------------------
Gross profit 6,835.0 5,657.3 3,270.1
Selling, general and administrative
expenses 3,624.6 3,296.3 3,034.0
Other (income) expense, net 1100.3 (20.0) 18.0
------------------------------------------------------------------------------
Operating profit 2,122.1 2,166.0 2,013.1
Interest expense, net 119.7 124.1 142.8
------------------------------------------------------------------------------
Income before income taxes 2,102.4 1,980.9 1,870.3
Provision for income taxes 680.3 620.6 582.0
------------------------------------------------------------------------------
Net income $ 1,720.1 $ 1,421.3 $ 1,190.3
------------------------------------------------------------------------------
Complex
example: Viacom, Inc. income statement
VIACOM INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In millions, except per share amounts)
----------------------------------------------------------------------------------------------
Year Ended December 31, 2004 2003 2002
----------------------------------------------------------------------------------------------
Revenues $ 22,525.9 $ 20,827.6 $19,186.8
Expenses:
Operating 12,545.8 11,879.8 10,735.5
Selling, general and administrative 4,142.1 3,732.3 3,498.6
Depreciation and amortization 809.9 741.9 711.8
Impairment charge (Note 3) 17,997.1
----------------------------------------------------------------------------------------------
Total expenses 35,494.9 16,354.0 14,945.9
----------------------------------------------------------------------------------------------
Operating income (loss) (12,969.0) 4,473.6 4,240.9
Interest expense (718.9) (742.9) (799.1)
Interest income 25.3 11.7 12.0
Other items, net 7.6 (3.0) (32.9)
----------------------------------------------------------------------------------------------
Earnings (loss) from continuing operations before
income taxes, equity in earnings (loss) of affiliated
companies and minority interest (13,655.0) 3,739.4 3,420.9
Provision for income taxes (1,378.6) (1,497.0) (1,338.3)
Equity in earnings (loss) of affiliated companies,
net of tax (20.8) .1 (37.3)
Minority interest, net of tax (5.1) (4.7) (3.3)
----------------------------------------------------------------------------------------------
Net earnings (loss) from continuing operations (15,059.5) 2,237.8 2,042.0
----------------------------------------------------------------------------------------------
Discontinued operations (Note 2):
Earnings (loss) from discontinued operations (1,182.7) (718.8) 255.3
Income taxes, net of minority interest 92.4 (83.6) (90.7)
----------------------------------------------------------------------------------------------
Net earnings (loss) from discontinued operations (1,090.3) (802.4) 164.6
----------------------------------------------------------------------------------------------
Net earnings (loss) before cumulative effect of
accounting change (16,149.8) 1,435.4 2,206.6
Cumulative effect of accounting change, net of minority
interest and tax (Note 1) (1,312.4) (18.5) (1,480.9)
----------------------------------------------------------------------------------------------
Net earnings (loss) $ (17,462.2) $ 1,416.9 $ 725.7
----------------------------------------------------------------------------------------------
Basic earnings (loss) per common share:
Net earnings (loss) from continuing operations $ (8.78) $ 1.28 $1.16
Net earnings (loss) from discontinued operations $ (.64) $ (.46) $ .09
Net earnings (loss) before cumulative effect of
accounting change $ (9.42) $ .82 $ 1.26
Cumulative effect of accounting change $ (.77) $ (.01) $ (.84)
Net earnings (loss) $(10.19) $ .81 $ .41
Diluted earnings (loss) per common share:
Net earnings (loss) from continuing operations $ (8.78) $ 1.27 $ 1.15
Net earnings (loss) from discontinued operations $ (.64) $ (.46) $ .09
Net earnings (loss) before cumulative effect of
accounting change $ (9.42) $ .82 $ 1.24
Cumulative effect of accounting change $ (.77) $ (.01) $ (.83)
Net earnings (loss) $(10.19) $ .80 $ .41
Weighted average number of common shares outstanding:
Basic 1,714.4 1,744.0 1,752.8
Diluted 1,714.4 1,760.7 1,774.8
Dividends per common share $ - $ .25 $ .12
Top
line
The term
"top line" refers to the total revenues or sales mentioned in
the income statement. This refers to the fact that the total
revenues collected by a company appears at the top of the income
statement.
Bottom
line
"Bottom
line" is the net profit that is calculated after subtracting
the expenses from revenue. Since this forms the last line of
the income statement, it is generally referred to as the bottom
line. It is important to investors as it represents the profit
for the year attributable to the shareholders.
External
links