Editing Income statement (section)

==Usefulness and limitations of income statement==
Income statements may help investors and creditors determine the past financial performance of the enterprise, predict the future performance, and assess the capability of generating future cash flows using the report of income and expenses. It is very important for the business.

However, information of an income statement has several limitations:
* 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 and LIFO accounting|FIFO or LIFO accounting]] to measure [[inventory#Accounting for inventory|inventory]] level).
* Some numbers depend on judgments and estimates (''e.g.'', [[depreciation]] expense depends on estimated useful life and salvage value).

                 - INCOME STATEMENT GREENHARBOR LLC -
                  For the year ended DECEMBER 31 2010
   
                                                €          €
                                              Debit     Credit
 Revenues
 GROSS REVENUES (including INTEREST income)             296,397
                                                       --------
 Expenses:
   ADVERTISING                                6,300
   BANK & CREDIT CARD FEES                      144
   BOOKKEEPING                                2,350
   SUBCONTRACTORS                            88,000
   ENTERTAINMENT                              5,550
   INSURANCE                                    750
   LEGAL & PROFESSIONAL SERVICES              1,575
   LICENSES                                     632
   PRINTING, POSTAGE & STATIONERY               320
   RENT                                      13,000
   MATERIALS                                 74,400
   TELEPHONE                                  1,000
   UTILITIES                                  1,494
                                                        --------
       TOTAL EXPENSES                                   (195,515)
                                                        --------
 NET INCOME                                              100,882

Guidelines for statements of comprehensive income and income statements of business entities are formulated by the [[International Accounting Standards Board]] and numerous country-specific organizations, for example the [[FASB]] in the U.S..

Names and usage of different accounts in the income statement depend on the type of organization, industry practices and the requirements of different jurisdictions.

If applicable to the business, summary values for the following items should be included in the income statement:<ref name="iasplus.com">[http://www.iasplus.com/standard/ias01.htm "Presentation of Financial Statements"] International Accounting Standards Board. Accessed 17 July 2010.</ref>

===Operating section===
* '''[[Revenue]]''' - Cash inflows or other enhancements of assets (including [[accounts receivable]]) of an entity during a period from delivering or producing goods, rendering services, or other activities that constitute the entity's ongoing major operations. It is usually presented as sales minus sales discounts, returns, and allowances. Every time a business sells a product or performs a service, it obtains revenue. This often is referred to as gross revenue or sales revenue.<ref name="ReferenceA">{{Citation needed|date=February 2018}}</ref>
* '''[[Expenses]]''' - Cash outflows or other using-up of assets or incurrence of liabilities (including [[accounts payable]]) during a period from delivering or producing goods, rendering services, or carrying out other activities that constitute the entity's ongoing major operations.
** '''[[Cost of Goods Sold]] (COGS) / [[Cost of Sales]]''' - represents the direct costs attributable to goods produced and sold by a business (manufacturing or merchandizing). It includes ''material costs'', ''direct labour'', and  ''overhead costs'' (as in [[absorption costing]]), and excludes operating costs (period costs) such as selling, administrative, advertising or R&D, etc.
** '''Selling, General and Administrative expenses ([[SG&A]] or SGA)''' - consist of the combined payroll costs. SGA is usually understood as a major portion of non-production related costs, in contrast to production costs such as direct labour.
*** '''Selling expenses''' - represent expenses needed to sell products (e.g., ''salaries of sales people, commissions and travel expenses, advertising, freight, shipping, depreciation of sales store buildings and equipment'', etc.).
*** '''General and Administrative (G&A) expenses ''' - represent expenses to manage the business (''salaries of officers / executives, legal and professional fees, utilities, insurance, depreciation of office building and equipment, office rents, office supplies'', etc.).
** '''[[Depreciation]] / [[Amortization (accounting)|amortisation]]''' - the charge with respect to [[fixed asset]]s / [[intangible asset]]s that have been capitalised on the [[balance sheet]] for a specific (accounting) period. It is a systematic and rational allocation of cost rather than the recognition of market value decrement.
** '''Research & Development (R&D) expenses''' - represent expenses included in research and development.

''Expenses'' recognised in the income statement should be analysed either by '''nature''' (raw materials, transport costs, staffing costs, depreciation, employee benefit etc.) or by '''function''' (cost of sales, selling, administrative, etc.). (IAS 1.99) If an entity categorises by function, then additional information on the nature of expenses, at least, – depreciation, amortisation and employee benefits expense – must be disclosed. (IAS 1.104)
The major exclusive of costs of goods sold, are classified as operating expenses. These represent the resources expended, except for inventory purchases, in generating the revenue for the period. Expenses often are divided into two broad sub classifications selling expenses and administrative expenses.<ref name="ReferenceA"/>

===Non-operating section===
* '''Other revenues or gains''' - revenues and gains from other than primary business activities (e.g., ''rent'', ''income from patents'', goodwill). It also includes unusual gains that are either unusual or infrequent, but not both (e.g., ''gain from sale of securities'' or ''gain from disposal of fixed assets'')
* '''Other expenses or losses''' - expenses or losses not related to primary business operations, (e.g., ''foreign exchange loss'').
* '''Finance costs''' - costs of borrowing from various creditors (e.g., ''[[interest expense]]s'', ''bank charges'').
* '''Income tax expense''' - sum of the amount of [[tax]] payable to tax authorities in the current reporting period (current tax liabilities/ tax payable) and the amount of [[deferred tax]] liabilities (or assets).

===Irregular items===
They are reported separately because this way users can better predict future cash flows - irregular items most likely will not recur. These are reported '''''net of taxes'''''.
* '''[[Discontinued operation]]s''' is the most common type of irregular items. Shifting business location(s), stopping production temporarily, or changes due to technological improvement do '''not''' qualify as discontinued operations. Discontinued operations ''must'' be shown separately.

'''Cumulative effect of changes in accounting policies (principles)''' is the difference between the book value of the affected assets (or liabilities) under the old policy (principle) and what the book value would have been if the new principle had been applied in the prior periods. For example, valuation of inventories using [[FIFO and LIFO accounting|LIFO]] instead of [[average costing|weighted average method]]. The changes should be applied '''retrospectively''' and shown as adjustments to the ''beginning'' balance of affected components in [[Equity (finance)|Equity]]. All comparative financial statements should be restated. (IAS 8)

However, '''''changes in estimates''''' (e.g., estimated useful life of a fixed asset) only requires '''prospective''' changes. (IAS 8)

'''No''' items may be presented in the income statement as '''extraordinary items''' under IFRS regulations or (as of ASU No. 2015-01<ref>[https://www.iasplus.com/en/publications/us/heads-up/2015/asu2015-1 "Heads Up — FASB issues ASU on extraordinary items"] Accessed 22 August 2023.</ref>) under US GAAP.  ''Extraordinary items'' are both unusual (abnormal) and infrequent, for example, unexpected natural 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).]

Additional items may be needed to fairly present the entity's results of operations. (IAS 1.85)

===Disclosures===
Certain items must be disclosed separately in the notes (or the [[statement of comprehensive income]]), if material, including:<ref name="iasplus.com"/>  (IAS 1.98)

* Write-downs of [[inventories]] to net realisable value or of [[property, plant and equipment]] to recoverable amount, as well as ''reversals'' of such write-downs
* Restructurings of the activities of an entity and ''reversals'' of any provisions for the costs of restructuring
* Disposals of items of property, plant and equipment
* Disposals of investments
*[[Discontinued operations]]
* Litigation settlements
* Other reversals of provisions

===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.

<math>\text{Earnings per share} = \frac{\text{Net income} - \text{Preferred stock dividends}}{\text{Weighted average of common stock shares outstanding}}</math>

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.'''