Editing Income statement

{{Short description|Type of financial statement}}
{{Redirect|Profit and loss||Profit and Loss (disambiguation)}}
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{{Accounting}}
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[[File:Sankey Diagram - Income Statement.jpg|alt=Sankey Diagram - Income Statement (by Adrián Chiogna)|thumb|
Sankey Diagram - Income Statement (by Adrián Chiogna)]]An '''income statement''' or '''profit and loss account'''<ref name="CUP">Professional English in Use - Finance, Cambridge University Press, p. 10</ref> (also referred to as a '''''profit and loss statement''''' (P&L), '''''statement of profit or loss''''', '''''revenue statement''''', '''''statement of financial performance''''', '''''earnings statement''''', '''''statement of earnings''''', '''''operating statement''''', or '''''statement of operations''''')<ref name="helfert-a">{{Cite book
  | last       = Helfert
  | first      = Erich A.
  | author-link = Erich A. Helfert
  | title      = Financial Analysis - Tools and Techniques - A Guide for Managers
  | chapter    = The Nature of Financial Statements: The Income Statement
  | url        =https://archive.org/details/financialanalysi00helf_497
  | url-access = limited
  | year       = 2001
  | publisher  = [[McGraw-Hill]]
  | page       = [https://archive.org/details/financialanalysi00helf_497/page/n64 40]
  | isbn = 9780071378345
 }}</ref> is one of the [[financial statement]]s of a company and shows the company's [[revenue]]s and [[expense]]s during a particular period.<ref name="CUP"/>

It indicates how the [[revenue]]s (also known as the ''“top line”'') are transformed into the [[net income]] or net profit (the result after all revenues and expenses have been accounted for). The purpose of the income statement is to show [[Management|managers]] and [[investor]]s whether the company made money (profit) or lost money (loss) during the period being reported.

An income statement represents a period of time (as does the [[cash flow statement]]). This contrasts with the [[balance sheet]], which represents a single moment in time.

[[Charitable organizations]] that are required to publish financial statements do not produce an income statement. Instead, they produce a similar statement that reflects funding sources compared against program expenses, administrative costs, and other operating commitments.  This statement is commonly referred to as the ''statement of activities''.<ref>{{cite web |url=http://www.1800net.com/nprc/fasb117.html#2 |title=ANALYSIS OF FASB 117 (Financial Accounting Standards Board) "FINANCIAL STATEMENTS OF NOT-FOR-PROFIT ORGANIZATIONS" 
}}</ref>  Revenues and expenses are further categorized in the statement of activities by the donor restrictions on the funds received and expended.

The income statement can be prepared in one of two methods.<ref>{{cite book | last = Warren | first = Carl | title = Survey of Accounting | publisher = South-Western College Pub | location = Cincinnati | year = 2008 | isbn = 978-0-324-65826-2 | pages = [https://archive.org/details/surveyofaccounti0000warr/page/128 128–132] | url = https://archive.org/details/surveyofaccounti0000warr/page/128 }}</ref> The Single Step income statement  totals revenues and subtracts expenses to find the bottom line. The  Multi-Step income statement takes several steps to find the bottom line: starting with the [[gross profit]], then calculating [[operating expenses]]. Then when deducted from the gross profit, yields income from operations.

Adding to income from operations is the difference of other revenues and other expenses. When combined with income from operations, this yields income before taxes. The final step is to deduct taxes, which finally produces the net income for the period measured.

==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.'''

==Sample income statement==
The following income statement is a very brief example prepared in accordance with [[IFRS]]. It does not show all possible kinds of accounts, but it shows the most usual ones. Differences between [[IFRS]] and [[US GAAP]] would affect the interpretation of the following sample income statements.
{{Pre|
                               Fitness Equipment Limited
                                  INCOME STATEMENTS
                                    (in millions)

  Year Ended March 31,                         2019          2020           2021
 ----------------------------------------------------------------------------------
  Revenue                                  £14,580.2      £11,900.4      £8,290.3
  Cost of sales                             (6,740.2)      (5,650.1)     (4,524.2)
                                         -------------   ------------  ------------
  ''Gross profit                               7,840.0        6,250.3       3,766.1  ''
                                         -------------   ------------  ------------

  SGA expenses                              (3,624.6)      (3,296.3)     (3,034.0)
                                         -------------   ------------  ------------
  '''''Operating profit                          4,215.4       2,954.0        732.1  '''''
                                         -------------   ------------  ------------

  Gains from disposal of fixed assets           46.3            -             -
  Interest expense                            (119.7)        (124.1)       (142.8)
                                         -------------   ------------  ------------
  Profit ''before'' tax                          4,142.0        2,829.9         589.3
                                         -------------   ------------  ------------

  Income tax expense                        (1,656.8)      (1,132.0)       (235.7)
                                         -------------   ------------  ------------
  '''''Profit (or loss) for the year           £  2,485.2     £  1,697.9     £   353.6  '''''

}}

{{Pre|
                                DEXTERITY INC. AND SUBSIDIARIES
                             CONSOLIDATED STATEMENTS OF OPERATIONS
                                        (In millions)

  Year Ended December 31,                                     2019         2020         2021
 ----------------------------------------------------------------------------------------------
  [[Revenue]]                                                  36,525.9   29,827.6   21,186.8
  [[Cost of sales]]                                            (18,545.8)   (15,858.8)   (11,745.5)
                                                         -----------  -----------  ------------
  ''[[Gross profit]]                                              17,980.1     13,968.8      9,441.3  ''
                                                         -----------  -----------  ------------

  Operating expenses:
    [[SG&A|Selling, general and administrative expenses]]           (4,142.1)    (3,732.3)     (3,498.6)
    [[Depreciation]]                                             (602.4)      (584.5)       (562.3)
    [[Amortization (accounting)|Amortisation]]                                             (209.9)      (141.9)       (111.8)
    [[Impaired asset|Impairment loss]]                                       (17,997.1)          —            —
                                                         -----------  -----------  ------------
  Total operating expenses                                (22,951.5)    (4,458.7)     (4,172.7)
                                                         -----------  -----------  ------------
  '''''Operating profit (or loss)                              (-4,971.4)    9,510.1      5,268.6   '''''
                                                         -----------  -----------  ------------

  Interest income                                              25.3         11.7         12.0
  Interest expense                                           (718.9)      (742.9)      (799.1)
                                                         -----------  -----------  ------------
  Profit (or loss) from continuing operations
   ''before'' tax, share of profit (or loss) from
   associates and non-controlling interest                (5,665.0)    8,778.9     4,481.5   '''
                                                         -----------  -----------  ------------

  Income [[tax]] expense                                       (1,678.6)    (3,510.5)    (1,789.9)
  Profit (or loss) from [[associate company|associates]], ''net of tax''                (20.8)         0.1        (37.3)
  Profit (or loss) from [[non-controlling interest]],
   ''net of tax''                                                  (5.1)        (4.7)        (3.3)
                                                         -----------  -----------  ------------
  '''Profit (or loss) from continuing operations             (7,348.7)    5,263.8     2,651.0  '''
                                                         -----------  -----------  ------------

  Profit (or loss) from [[discontinued operations]],
   ''net of tax''                                              (1,090.3)      (802.4)       164.6
                                                         -----------  -----------  ------------
  '''''Profit (or loss) for the year                           (8,439)    4,461.4     2,486.4
}}

==Bottom line==
“Bottom line” is the [[net income]] that is calculated after subtracting the expenses from revenue. Since this forms the last line of the income statement, it is informally called “bottom line.” It is important to investors as it represents the profit for the year attributable to the shareholders.

After revision to IAS 1 in 2003, the Standard is now using '''profit or loss for the year''' rather than ''net profit or loss'' or ''net income'' as the descriptive term for the bottom line of the income statement.

==Requirements of IFRS==
On 6 September 2007, the [[International Accounting Standards Board]] issued a revised ''IAS 1: Presentation of Financial Statements'', which is effective for annual periods beginning on or after 1 January 2009.

A business entity adopting IFRS must include:
* a '''statement of comprehensive income''' or
* ''two'' separate statements comprising:
:# an '''income statement''' displaying components of profit or loss ''and''
:# a ''statement of comprehensive income'' that ''begins'' with profit or loss (bottom line of the income statement) and displays the items of [[other comprehensive income]] for the reporting period. (IAS1.81)

All non-owner changes in equity (i.e., ''comprehensive income'') shall be presented either in the statement of comprehensive income or in a separate income statement and a statement of comprehensive income. Components of comprehensive income may not be presented in the [[statement of changes in equity]].

''[[Comprehensive income]]'' for a period includes profit or loss (net income) for that period and [[other comprehensive income]] recognised in that period.

All items of income and expense recognised in a period must be included in profit or loss unless a Standard or an Interpretation requires otherwise. (IAS 1.88) Some IFRSs require or permit that some components to be excluded from profit or loss and instead to be included in other comprehensive income. (IAS 1.89)

===Items and disclosures===
The '''statement of comprehensive income''' should include:<ref name="iasplus.com"/> (IAS 1.82)
# [[Revenue]]
# Finance costs (including [[interest expense]]s)
# Share of the profit or loss of [[associate company|associates]] and [[joint ventures]] accounted for using the [[equity method]]
# [[Tax]] expense
# A ''single'' amount comprising the total of (1) the ''post-tax'' profit or loss of ''[[discontinued operations]]'' and (2) the ''post-tax'' gain or loss recognised on the disposal of the assets or disposal group(s) constituting the ''discontinued operation''
# Profit or loss
# Each component of [[other comprehensive income]] classified by nature
# Share of the other comprehensive income of associates and joint ventures accounted for using the equity method
# [[Total comprehensive income]]

The following items must also be disclosed in the statement of comprehensive income as allocations for the period: (IAS 1.83)
* Profit or loss for the period attributable to [[non-controlling interest]]s and owners of the [[parent company|parent]]
* Total comprehensive income attributable to non-controlling interests and owners of the parent

''No'' items may be presented in the statement of comprehensive income (or in the income statement, if separately presented) or in the notes as ''extraordinary items''.

==See also==
{{div col}}
*[[Comprehensive income]]
*[[Cash flow]]
*[[Trading statement]]
*[[Profit model]]
*[[Statement of changes in equity]]
*[[Model audit]]
*[[International Financial Reporting Standards]] (and their [[requirements of IFRS|requirements]])
{{div col end}}
*[[chart of accounts#Profit and Loss Accounts|Profit and Loss Accounts]]


==References==
{{Reflist}}
* Harry I. Wolk, James L. Dodd, Michael G. Tearney. ''Accounting Theory: Conceptual Issues in a Political and Economic Environment'' (2004). {{ISBN|0-324-18623-1}}.
* Angelico A. Groppelli, Ehsan Nikbakht. ''Finance'' (2000). {{ISBN|0-7641-1275-9}}.
* Barry J. Epstein, Eva K. Jermakowicz. ''Interpretation and Application of International Financial Reporting Standards'' (2007). {{ISBN|978-0-471-79823-1}}.
* Jan R. Williams, Susan F. Haka, Mark S. Bettner, Joseph V. Carcello. ''Financial & Managerial Accounting'' (2008). {{ISBN|978-0-07-299650-0}}.

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[[Category:Income statement| ]]
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