The income statement is the term used to define a financial statement component that calculates the profit or loss of a period. It is also called profit and loss account, statement of financial performance, statement of operations, earning statements, and operating statements.
Income statements may be prepared for any period of time such as weekly, monthly, quarterly, half-yearly, or annually. But in various jurisdictions, it is mandatory to prepare profit & loss statements at least on a yearly basis. This statement starts with a header that contains the name of the entity, the name of the statement, and the period covered in the statement such as:
ABC Company
Income Statement
For the Year Ended 31st Dec 2016
This statement is prepared over the accrual basis of accounting, that is, on a non-cash basis. This is the difference between a cash flow statement and an income statement.
Components of Income Statement
The normal components are:
Sales revenue and gains
- Revenue from business operations
- Revenue from non-business operations
- Gain from sale of fixed assets
Expenses & other losses
- Expenses incurred on primary activities
- Expenses incurred on secondary activities
- Losses on sale of fixed assets
Format
Profit & loss statement is prepared in two formats:
T Format
Just like ledger accounts, profit & loss statement is also prepared in T format. Due to presentation issues, this format is rarely used in practical life and report format has replaced this format altogether.
Report Format
Under this format, the income statement starts with a header as mentioned above, then items of revenue and gains are listed. Later cost of goods sold is listed and subtracted to arrive at gross profit figure. Out of this figure, various operating, admin and selling expenses are subtracted to find out the figure of net income or net profit.
Specimen income statement / specimen Profit & Loss Statement
ABC Company
Income Statement
For the Year Ended 31 Dec 2015
| Notes | 2016 | 2015 | |
| Revenue | 11 | 15,000 | 13,000 |
| Cost of Goods Sold | 12 | 9,000 | 8,000 |
| Gross Profit | 6,000 | 5,000 | |
| Distribution & Selling Expenses | 13 | 1,000 | 800 |
| Administrative Expenses | 14 | 2,000 | 2,200 |
| Operating Expenses | 15 | 2,000 | 1,000 |
| Operating Profit / EBIT | 1,000 | 1,000 | |
| Interest Expense | 16 | 300 | 350 |
| Profit before tax/ earnings before tax | 700 | 650 | |
| Income Taxes | 17 | 200 | 180 |
| Profit after tax/ earnings after tax | 500 | 470 | |
| Earning per share | 0.5 | 0.47 | |
Example
CDX is involved in manufacturing shoes and has become the market leader in a very short span of time. The director of the CDX is interested in knowing the financial position of the company. In order to know the profitability of the business, you as the management accountant have collected the data from the accounting system. The following information is available from its accounting records:
Cash sales are amounting to $ 3,000,000, which is 30 {1bb28fb76c3d282be6cfd0391ccf1d9529baae691cd895e2d45215811b51644c} of the total sales revenue.
Purchases are $ 5,000,000.
The opening & closing stock of finished goods are $ 1,000,000 & $ 2,000,000.
The electricity expenses are $1,000.
Rent expenses are $ 2000,000.
Depreciation expenses are $ 50,000.
Insurance expenses are $ 500,000.
Stationary expenses are $ 20,000.
Advertising expenses are $ 2,000,000.
Commission expenses are $ 50,000.
Distribution expenses are $ 100,000.
Required
Being the management accountant, you are required to prepare income statement of CDX.
Solution
Cash sales = $ 3,000,000
Total sales = 3,000,000 / 30 {1bb28fb76c3d282be6cfd0391ccf1d9529baae691cd895e2d45215811b51644c} = $ 10,000,000
Credit sales = 10,000,000 – 3,000,000 = $ 7,000,000
Cost of goods sold = Purchases + Opening stock – Closing stock = 5,000,000 + 1,000,000 – 2,000,000 = $ 4,000,000
Operating expenses = rent expenses + depreciation expenses + insurance expenses + stationary expenses + commission expenses + distribution expenses = 2,000,000 + 500,000 + 50,000 + 20,000 + 50,000 + 100,000 = $ 2,720,000
Now, we will prepare income statement as follows:
ADX
Income Statement
For the Period Ended 31st December, 2016
| Sales revenue | 10,000,000 |
| Cost of goods sold | (4,000,000) |
| Gross profit | 6,000,000 |
| Operating expenses | (2,720,000) |
| Advertising expenses | (2,000,000) |
| Net profit | 1,280,000 |
The income statement shows above that the ADX is earning profit while producing shoes and selling in the market. So, this is a satisfactory report for the director of the ADX. But ADX needs to focus on its credit sales as it is a large portion of the total sales. If the customers fail to pay, this could lead to a big amount of bad debt and this will cause a severe loss to the company ADX.