The income statement is sometimes referred to as the earnings statement, the profit and loss statement, or the statement of operations. The first item on the income statement is revenue, which could be broken down into different categories of revenue or sales. If manufacturing and/or inventory is involved, cost of goods sold would also be reported. Net sales minus cost of goods sold results in gross profit.
After gross profit, the expenses of the business are reported. The expenses can be separated into operating and non-operating expenses, and the operating expenses can be further broken down into selling expenses and general and administrative expenses. Gross profit less operating expenses equals income from operations. Income from operations less non-operating expenses, such as interest expense, results in net income.
Net sales is figured by deducting sales returns and allowances and sales discounts from total sales. Cost of goods sold is computed as beginning inventory plus purchases, less any purchase returns and allowances and purchase discounts, less ending inventory. Some examples of selling expenses are sales salaries and advertising. General and administrative expenses include office salaries, utilities, and depreciation.
In some cases an income statement may have more sections and subtotals. Additional items sometimes included on an income statement are discontinued operations, extraordinary items, and cumulative effect of a change in accounting principle. When these items are reported, the first section of the income statement would report income from continuing operations. This would be the normal running of the business.
After income from continuing operations would be any income or loss from discontinued operations. Discontinued operations are only present if the company’s management has a formal plan to sell or discontinue a segment of the business. Included in this section of the income statement would be any income or loss from the operation of the discontinued operations segment, and any gain or loss from the disposal of the segment. The subtotal after discontinued operations is income before extraordinary items and cumulative effect of accounting change.
Any extraordinary items would be reported next on the income statement. An extraordinary item is a gain or loss that is of a material amount, unusual, and not expected to recur in the near future. Extraordinary items are reported net of the related income tax effects, if any.
The last section of an income statement is used to show any cumulative effect of a change in accounting principle. The cumulative effect is figured by re-calculating the prior years’ income as if the new accounting method had been used all along.
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