Income statement

From ArticleWorld

The income statement can be divded in revenues, cost of good sold, net income and expenses. Income statements give you very useful history information of the business and allow you to budget for future operations and consider future cash flow. An income statement is also known as a statement of profit and loss.

The nature of an income statement is that it's a representation of dealings over a set period of time, for example, “for the month which ended May 31, 2008”, or “for the year which ended December 31, 2008”. It is separate from the balance sheet, which really reflects a certain point in time. The income statements should contain what is referred to as “temporary accounts” and the balance sheet should contains “permanent” accounts. “Temporary accounts” like expenses and sales revenues are “closed out”, net income and loss are determined and the net amount finds itself in the owner’s equity account. The accounts are closed at the finish of a set period of time, opened again and reused for the next period.

The income statement is calculated according to revenues minus cost of goods sold, subtracted by expenses, equals the net income or loss.

Revenues represent the sales of items normally sold by your business; what products are you selling? Are you selling services? Are you selling goods? Revenues is the selling price multiplied by the number of items sold. Revenues are most frequently displayed as net sales and some modification to sales would allow for sales discounts, sales returns and allowances.

Should the company trying to sell goods, the proceeding component of the income statement would be the price of goods sold component.

Should the company sells services, will not have this portion. Because this is such a large part of expenses for a retail shop, though it's an expense, it's broken out separately from other expenses.

The company needs to know what inventory it commenced with and what inventory it still had during the end of the time period. Additionally, it needs to figure out what inventory was bought during the period of time. There are a variety of techniques to value the inventory, such as Lifo last in, first out, Fifo first in, first out, specific identification, average cost, etc. Since we are undertaking a high-level look at the income statement, it's just essential at this time to note that, due to the subjectivity of inventory methods, this can often be more of an art than a true science.

Goods available for sale subtracted by final inventory will equal the cost of goods sold. Starting inventory combined with goods purchased amounts to goods left for sale.

Expenses represent outflows of cash needed by the business operation. Some expenses are easy to identify, such as utilities, rent or mortgage, supplies, office salaries, etc. and these are referred to selling and administrative expenses. Selling expenses are equal to costs related to selling goods, such as the freight, salesperson’s salaries, shipping, advertising, etc. R&D costs are also valid expenses. If you own the vehicles, building or equipment, there are some depreciation costs. Means if you own an asset that lasts for a several years, you could write off a portion of the asset's cost as a depreciation expense for a particular number of years. Like inventory costs, there are a number of ways to subjectively figure out depreciation, such as accelerated depreciation methods, straight line, etc. Therefore there are more than just one unique available answer to determine the various depreciation costs.

To figure out the net income or loss, take revenues subtracted by cost of goods sold minus expenses. If that number is positive, it's net income. If that number is negative, it's net loss. This total is closed to an equity account, like the owner’s capital account for a sole proprietorship or the stockholder’s equity for corporations.

Income and expenses not within the sphere of usual business transactions should be included in its own separate section. For example, if the business is a jewelry shop and they are selling one of their buildings or portion of their empty property, this results in an influx of funds. This isn't what you would expect a clothing shop to usually do. In order to make income statements comparable year after year, this very special income will need to be presented in quite a different part above net income.

In conclusion, at a high-level we’ve discussed the income statement, defined the individual parts of revenue, expenses, cost of goods sold and net income. We’ve specified areas like inventory valuation and depreciation where separate methods can be utilized to determine the different financial amounts. Companies are required to select their methods carefully and adhere to them for consistency. It's not entirely impossible to alternate these valuation techniques, but it would require some special disclosures, etc. Once you gain and understanding of the basics of the income statement, it will help you make sense of income statements from several different companies, irrespective of the kind of their day to day business.