Definition of Income statement
Income statement
A financial report that summarizes a company’s revenue, cost of
goods sold, gross margin, other costs, income, and tax obligations.
INCOME STATEMENT
An accounting statement that summarizes information about a company in the following format:
Net Sales
– Cost of goods sold
--------------------
Gross profit
– Operating expenses
--------------------
Earnings before income tax
– income tax
--------------------
= Net income or (Net loss)
Formally called a “consolidated earnings statement,” it covers a period of time such as a quarter or a year.
income statement
Financial statement that shows the revenues, expenses, and net income of a firm over a period of time.
income statement
Financial statement that summarizes sales revenue
and expenses for a period and reports one or more profit lines for the
period. It’s one of the three primary financial statements of a business.
The bottom-line profit figure is labeled net income or net earnings by
most businesses. Externally reported income statements disclose less
information than do internal management profit reports—but both are
based on the same profit accounting principles and methods. Keep in
mind that profit is not known until accountants complete the recording
of sales revenue and expenses for the period (as well as determining any
extraordinary gains and losses that should be recorded in the period).
Profit measurement depends on the reliability of a business’s accounting
system and the choices of accounting methods by the business. Caution:
A business may engage in certain manipulations of its accounting methods,
and managers may intervene in the normal course of operations for
the purpose of improving the amount of profit recorded in the period,
which is called earnings management, income smoothing, cooking the
books, and other pejorative terms.
Income Statement
One of the basic financial statements; it lists the revenue and expense accounts of the company.
The income statement is prepared for a given period of time.
Related Terms:
A statement showing the revenues, expenses, and income (the
difference between revenues and expenses) of a corporation over some period of time.
income statement that presents items as a percentage of revenues.
A financial statement that displays a breakdown of total sales and total expenses.
Earnings of a firm as reported on its income statement.
Yearly record of a publicly held company's financial condition. It includes a description of the
firm's operations, its balance sheet and income statement. SEC rules require that it be distributed to all
shareholders. A more detailed version is called a 10-K.
Interest that is not immediately expensed, but rather is considered as an asset and is then
amortized through the income statement over time.
The location of five New York futures exchanges: Commodity
Exchange, Inc. (COMEX), the New York Mercantile exchange (NYMEX), the New York Cotton Exchange,
the Coffee, Sugar and Cocoa exchange (CSC), and the New York futures exchange (NYFE). common size
statement A statement in which all items are expressed as a percentage of a base figure, useful for purposes of
analyzing trends and the changing relationship between financial statement items. For example, all items in
each year's income statement could be presented as a percentage of net sales.
An account for the investment credit to show all income statement benefits of the credit
in the year of acquisition, rather than spreading them over the life of the asset acquired.
Cash not required for operations or for reinvestment. Often defined as earnings before
interest (often obtained from operating income line on the income statement) less capital expenditures less the
change in working capital.
The accounting principle that requires the recognition of all costs that are associated with
the generation of the revenue reported in the income statement.
A financial statement showing the forecast or projected operating results and balance
sheet, as in pro forma income statements, balance sheets, and statements of cash flows.
The process of dividing each expense item in the income statement of a given year by net
sales to identify expense items that rise faster or slower than a change in sales.
The amount sold after customers’ returns, sales discounts, and other allowances are taken away from
gross sales. (Companies usually just show the net sales amount on their income statements, omitting returns, allowances, and the like.)
Profits a company plowed back into the business over the years. Last January’s retained earnings, plus the net income or profit that a company made this year (which is calculated on the income statement), minus dividends paid out, equals the retained earnings balance on the balance sheet date.
A financial analysis technique that relates key amounts on the income statement and balance sheet to a 100 percent or base figure for the present and previous year.
It shows the percentage change from last year to this year, making it easier to spot problems that require analysis.
Net income
The last line of the income statement; it represents the amount that the company earned during a specified period.
Temporary accounts
The accounts found on the income statement and the statement of Retained Earnings; these accounts are reduced to zero at the end of every accounting period.
balance sheet
A term often used instead of the more formal and correct
term—statement of financial condition. This financial statement summarizes
the assets, liabilities, and owners’ equity sources of a business at a
given moment in time. It is prepared at the end of each profit period and
whenever else it is needed. It is one of the three primary financial statements
of a business, the other two being the income statement and the
statement of cash flows. The values reported in the balance sheet are the
amounts used to determine book value per share of capital stock. Also,
the book value of an asset is the amount reported in a business’s most
recent balance sheet.
extraordinary gains and losses
No pun intended, but these types of gains
and losses are extraordinarily important to understand. These are nonrecurring,
onetime, unusual, nonoperating gains or losses that are
recorded by a business during the period. The amount of each of these
gains or losses, net of the income tax effect, is reported separately in the
income statement. Net income is reported before and after these gains
and losses. These gains and losses should not be recorded very often, but
in fact many businesses record them every other year or so, causing
much consternation to investors. In addition to evaluating the regular
stream of sales and expenses that produce operating profit, investors
also have to factor into their profit performance analysis the perturbations
of these irregular gains and losses reported by a business.
financial reports and statements
Financial means having to do with
money and economic wealth. statement means a formal presentation.
Financial reports are printed and a copy is sent to each owner and each
major lender of the business. Most public corporations make their financial
reports available on a web site, so all or part of the financial report
can be downloaded by anyone. Businesses prepare three primary financial
statements: the statement of financial condition, or balance sheet;
the statement of cash flows; and the income statement. These three key
financial statements constitute the core of the periodic financial reports
that are distributed outside a business to its shareowners and lenders.
Financial reports also include footnotes to the financial statements and
much other information. Financial statements are prepared according to
generally accepted accounting principles (GAAP), which are the authoritative
rules that govern the measurement of net income and the reporting
of profit-making activities, financial condition, and cash flows.
Internal financial statements, although based on the same profit
accounting methods, report more information to managers for decision
making and control. Sometimes, financial statements are called simply
financials.
gross margin, or gross profit
This first-line measure of profit
equals sales revenue less cost of goods sold. This is profit before operating
expenses and interest and income tax expenses are deducted. Financial
reporting standards require that gross margin be reported in
external income statements. Gross margin is a key variable in management
profit reports for decision making and control. Gross margin
doesn’t apply to service businesses that don’t sell products.
management control
This is difficult to define in a few words—indeed, an
entire chapter is devoted to the topic (Chapter 17). The essence of management
control is “keeping a close watch on everything.” Anything can
go wrong and get out of control. Management control can be thought of
as the follow-through on decisions to ensure that the actual outcomes
happen according to purposes and goals of the management decisions
that set things in motion. Managers depend on feedback control reports
that contain very detailed information. The level of detail and range of
information in these control reports is very different from the summarylevel
information reported in external income statements.
product cost
This is a key factor in the profit model of a business. Product
cost is the same as purchase cost for a retailer or wholesaler (distributor).
A manufacturer has to accumulate three different types of production
costs to determine product cost: direct materials, direct labor, and
manufacturing overhead. The cost of products (goods) sold is deducted
from sales revenue to determine gross margin (also called gross profit),
which is the first profit line reported in an external income statement
and in an internal profit report to managers.
profit
The general term profit is not precisely defined; it may refer to net
gains over a period of time, or cash inflows less cash outflows for an
investment, or earnings before or after certain costs and expenses are
deducted from income or revenue. In the world of business, profit is
measured by the application of generally accepted accounting principles
(GAAP). In the income statement, the final, bottom-line profit is generally
labeled net income and equals revenue (plus any extraordinary gains)
less all expenses (and less any extraordinary losses) for the period. Inter-
nal management profit reports include several profit lines: gross margin,
contribution margin, operating profit (earnings before interest and
income tax), and earnings before income tax. External income statements
report gross margin (also called gross profit) and often report one
or more other profit lines, although practice varies from business to
business in this regard.
profit and loss statement (P&L statement)
This is an alternative moniker
for an income statement or for an internal management profit report.
Actually, it’s a misnomer because a business has either a profit or a loss
for a period. Accordingly, it should be profit or loss statement, but the
term has caught on and undoubtedly will continue to be profit and loss
statement.
revenue-driven expenses
Operating expenses that vary in proportion to
changes in total sales revenue (total dollars of sales). Examples are sales
commissions based on sales revenue, credit card discount expenses, and
rents and franchise fees based on sales revenue. These expenses are one
of the key variables in a profit model. Segregating these expenses from
other types of expenses that behave differently is essential for management
decision-making analysis. (These expenses are not disclosed separately
in externally reported income statements.)
Extraordinary item
A transaction that rarely occurs, and which is unusual, such as
expropriation of company property by a foreign government. It is reported as a separate
line item on the income statement.
Book Income
Pretax income reported on the income statement.
Cumulative-Effect Adjustment
The cumulative, after-tax, prior-year effect of a change in accounting
principle. It is reported as a single line item on the income statement in the year of the
change in accounting principle. The cumulative-effect-type adjustment is the most common accounting
treatment afforded changes in accounting principle.
Income Tax Provision
The expense deduction from pretax book income reported on the
income statement. It consists of both current income tax expense and deferred income tax
expense. The terms income tax expense and income tax provision are used interchangeably.
Operating Income
A measure of results produced by the core operations of a firm. It is common
for both recurring and nonrecurring items that are associated with operations to be included
in this measure. Operating income is typically found in multistep income statements and is a pretax
measure.
Capitalize
In Finance: to find the present value of a stream of cash flows.
In Accounting: to reflect costs of the balance sheet rather than charge them off through the income statement, as to capitalize major repairs to a fixed asset.
Convention statement
An annual statement filed by a life insurance company in each state where it does
business in compliance with that state's regulations. The statement and supporting documents show, among
other things, the assets, liabilities, and surplus of the reporting company.
Economic income
Cash flow plus change in present value.
Fixed-income equivalent
Also called a busted convertible, a convertible security that is trading like a straight
security because the optioned common stock is trading low.
Fixed-income instruments
Assets that pay a fixed-dollar amount, such as bonds and preferred stock.
Fixed-income market
The market for trading bonds and preferred stock.
Income beneficiary
One who receives income from a trust.
Income bond
A bond on which the payment of interest is contingent on sufficient earnings. These bonds are
commonly used during the reorganization of a failed or failing business.
Income fund
A mutual fund providing for liberal current income from investments.
Income stock
Common stock with a high dividend yield and few profitable investment opportunities.
Investment income
The revenue from a portfolio of invested assets.
Investment management Also called portfolio management and money management, the process of
managing money.
Monthly income preferred security (MIP)
Preferred stock issued by a subsidiary located in a tax haven.
The subsidiary relends the money to the parent.
Net income
The company's total earnings, reflecting revenues adjusted for costs of doing business,
depreciation, interest, taxes and other expenses.
Notes to the financial statements
A detailed set of notes immediately following the financial statements in
an annual report that explain and expand on the information in the financial statements.
Official statement
A statement published by an issuer of a new municipal security describing itself and the issue
Pro forma financial statements
Financial statements as adjusted to reflect a projected or planned transaction.
Registration statement
A legal document that is filed with the SEC to register securities for public offering.
Spread income
Also called margin income, the difference between income and cost. For a depository
institution, the difference between the assets it invests in (loans and securities) and the cost of its funds
(deposits and other sources).
Statement billing
Billing method in which the sales for a period such as a month (for which a customer also
receives invoices) are collected into a single statement and the customer must pay all of the invoices
represented on the statement.
Statement of cash flows
A financial statement showing a firm's cash receipts and cash payments during a
specified period.
Statement-of-cash-flows method
A method of cash budgeting that is organized along the lines of the statement of cash flows.
Statement of Financial Accounting Standards No. 8
This is a currency translation standard previously in
use by U.S. accounting firms. See: statement of Accounting Standards No. 52.
Statement of Financial Accounting Standards No. 52
This is the currency translation standard currently
used by U.S. firms. It mandates the use of the current rate method. See: statement of Financial Accounting
Standards No. 8.
Taxable income
Gross income less a set of deductions.
Underwriting income
For an insurance company, the difference between the premiums earned and the costs
of settling claims.
CASH-FLOW STATEMENT
A statement that shows where a company’s cash came from and where it went for a period of time, such as a year.
INCOME TAX
What the business paid to the IRS.
NET INCOME
The profit a company makes after cost of goods sold, expenses, and taxes are subtracted from net sales.
RATIO OF NET INCOME TO NET SALES
A ratio that shows how much net income (profit) a company made on each dollar of net sales. Here’s the formula:
(Net income) / (Net sales)
RATIO OF NET SALES TO NET INCOME
A ratio that shows how much a company had to collect in net sales to make a dollar of profit. Figure it this way:
(Net sales) / (Net income)
Cash Flow statement
A financial report that shows the movement in cash for a business during an accounting period.
Financial reports or statements
The Profit and Loss account, Balance Sheet and Cash Flow statement of a business.
Residual income (RI)
The profit remaining after deducting from profit a notional cost of capital on the investment in a business or division of a business.
Dividend income
income that a company receives in the form of dividends on stock in other companies that it holds.
Interest income
income that a company receives in the form of interest, usually as the result of keeping money in interest-bearing accounts at financial institutions and the lending of money to other companies.
Statement of Cash Flows
One of the basic financial statements; it lists the cash inflows and cash outflows of the company, grouped into the categories of operating activities, financing activities, and investing activities. The statement of Cash Flows is prepared for a specified period of time.
Statement Retained Earnings
One of the basic financial statements; it takes the beginning balance of retained earnings and adds net income, then subtracts dividends. The statement of Retained Earnings is prepared for a specified period of time.
statement of cash flows
One of the three primary financial statements
that a business includes in the periodic financial reports to its outside
shareowners and lenders. This financial statement summarizes the business’s
cash inflows and outflows for the period according to a threefold
classification: (1) cash flow from operating activities (cash flow from
profit), (2) cash flow from investing activities, and (3) cash flow from
financing activities. Frankly, the typical statement of cash flows is difficult
to read and decipher; it includes too many lines of information and
is fairly technical compared with the typical balance sheet and income
statement.
earnings before interest and income tax (EBIT)
A measure of profit that
equals sales revenue for the period minus cost-of-goods-sold expense
and all operating expenses—but before deducting interest and income
tax expenses. It is a measure of the operating profit of a business before
considering the cost of its debt capital and income tax.
statement of financial condition
See balance sheet.
net income (also called the bottom line, earnings, net earnings, and net
operating earnings)
This key figure equals sales revenue for a period
less all expenses for the period; also, any extraordinary gains and losses
for the period are included in this final profit figure. Everything is taken
into account to arrive at net income, which is popularly called the bottom
line. Net income is clearly the single most important number in business
financial reports.
stockholders' equity, statement of changes in
Although often considered
a financial statement, this is more in the nature of a supporting schedule
that summarizes in one place various changes in the owners’ equity
accounts of a business during the period—including the issuance and
retirement of capital stock shares, cash dividends, and other transactions
affecting owners’ equity. This statement (schedule) is very helpful
when a business has more than one class of stock shares outstanding
and when a variety of events occurred during the year that changed its
owners’ equity accounts.
mission statement
a written expression of organizational purpose that describes how the organization uniquely meets its targeted customers’ needs with its products or services
residual income
the profit earned by a responsibility center that exceeds an amount "charged" for funds committed to that center
Statement on Management Accounting (SMA)
a pronouncement developed and issued by the Management
Accounting Practices Committee of the Institute of Management
Accountants; application of these statements is
through voluntary, not legal, compliance
tax-deferred income
current compensation that is taxed at a future date
tax-exempt income
current compensation that is never taxed
values statement
n organization’s statement that reflects its
culture by identifying fundamental beliefs about what is
important to the organization
vision statement
a written expression about the organization’s
future upon which all company personnel can base
their decisions and behavior so that everyone is working
toward the same long-run results
Fixed-income security
A security that pays a specified cash flow over a
specific period. Bonds are typical fixed-income securities.
Income
Net earnings after all expenses for an accounting period are subtracted from all
revenues recognized during that period.
Income tax
A government tax on the income earned by an individual or corporation.
Net income
The excess of revenues over expenses, including the impact of income taxes.
Operating income
The net income of a business, less the impact of any financial activity,
such as interest expense or investment income, as well as taxes and extraordinary
items.
Statement of cash flows
Part of the financial statements; it summarizes an entity’s cash
inflows and outflows in relation to financing, operating, and investing activities.
Statement of retained earnings
An adjunct to the balance sheet, providing more detailed information about the beginning balance, changes, and ending balance in
the retained earnings account during the reporting period.
residual income
Also called economic value added. Profit minus cost of capital employed.
statement of cash flows
Financial statement that shows the firm’s cash receipts and cash payments over a period of time.
Disposable Income
income less income tax.
Incomes Policy
A policy designed to lower inflation without reducing aggregate demand. Wage/price controls are an example.
National Income
GDP with some adjustments to remove items that do not make it into anyone's hands as income, such as indirect taxes and depreciation. Loosely speaking, it is interpreted as being equal to GDP.
National Income and Product Accounts
The national accounting system that records economic activity such as GDP and related measures.
Permanent Income Hypothesis
Theory that individuals base current consumption spending on their perceived long-run average income rather than their current income.
Real Income
income expressed in base-year dollars, calculated by dividing nominal income by a price index.
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