MBA Accounting & Finance

SO WHAT IS THIS INCOME STATEMENT?

The Income Statement reports ONLY the PROFITABILITY of a business

Unlike a Balance Sheet, which is a snapshot of a point of time, Income Statement reflects the profitability of a business FOR A SPECIFIC PERIOD OF TIME (monthly, quarterly or yearly).

In the Income Statement, MATCHING & ACCRUALS concepts prevails:

Revenue is recognized in the period in which goods and services are sold, not necessarily the period in which cash is received.

Expense is recognized in the period in which goods and services are used, not necessarily the period in which cash is paid.

A few years ago, this Income Statement is called PROFIT & LOSS Statement.

Nowadays, it is called Income Statement or Earnings Statement

The basic equation for the Income Statement is:

Revenue-Costs & Expenses = Income

When Revenue is MORE than Costs & Expenses = Income/Profit/Earnings

( The term Income or Profit or Earnings has the same meaning)

When Revenue is LESS than Costs & Expenses = Loss

The Normal Format Of An Income Statement is as follows:

INCOME STATEMENT FOR THE PERIOD FROM 1/1/06 TO 31/12/06

Net Revenue A

Cost of Goods B

Gross Margin C=A-B

General & Administrative D

Sales & Marketing E

Research & Development F

Operating Expenses G= D+E+F

Income From Operations H =C-G ( Gross margin - Operating Expenses)

Interest I

Income before taxes J=H-I

Net Income after taxes K