Overview

The Income Statement

The Income Statement (or Statement of Operations) is a tabulation of revenue and expenses, the latter usually broken down (or summarized) by major categories.

Operating income is an important measure of the entity's performance, since it represents the pre-tax income earned (or loss incurred) from the core operations of the business, before considering certain financial costs, other non-operating items, and extraordinary gains or losses.

Other income and expense includes financial costs and other items, the occurrence of which are tangential to the primary purposes of me business, such as losses on abandoned or sold assets.

Revenue (or Sales) - Cost of Sales   = Gross Profit - Selling expenses - Administrative expenses   = Operating income + /- Other income or expense - Income taxes   = Income before extraordinary items + /- Extraordinary items   = Net income

Extraordinary items are defined as those that are unusual and infrequently occurring, and include such losses as those from natural disasters, expropriation of foreign properties, and gains or losses arising from extinguishment of debt. While not extraordinary per se, certain other items, including the results of discontinued operations and the cumulative effects of changes in accounting principles, are also presented separately at the bottom of the Income Statement, where the reader can distinguish these from ongoing results of operations.

Net income or loss is the all-inclusive "bottom line" that reflects all economic activity, by the enterprise for the period being reported on (year, quarter, month, etc.), except for transactions with owners.

ABC Corporation Income Statement For the Years Ended December 31 Current and Previous Year   Current Year Previous Year Sales $ 7,934,000 $ 5,891,000 Cost of goods sold 6,816,000 5,155,000   Gross profit 1,118,000 736,000 Selling, general and administrative expenses 100,000 100,000   Income from operations 1,018,000 636,000   Other income (expenses) (242,000) (215,000) Interest expense 9,000 1,000 Dividend income 9,000 1,000 Interest income 50,000 44,000 Other items net 5,000 ---   Other (expense) net (178,000) (170,000)   Income before provision for income taxes and extraordinary item 840,000 466,000 Provision for income taxes 325,000 194,000   Income before extraordinary item 515,000 272,000 Extraordinary item, less applicable Income tax benefit of $32,000 (50,000) ---   Net income 465,000 272,000 Retained earnings - beginning of year 2,809,000 2,670,000 Dividends paid (154,000) (133,000)   Retained earnings - end of year $ 3,120,000 $ 2,809,000

The Income Statement in Greater Detail

Sales result when a company provides customers those products or services that it ii in business to sell. Operating revenue is realized when a firm exchanges its goods (products) or services (such us legal, transportation, accounting) for cash or a right to receive cash.

Cost Of Goods Sold represents the cost of producing goods for sale. For example, cost of goods sold in a manufacturing company is comprised of direct labor, direct materials and overhead.

Gross Profit is a measure of the profit contribution from the sales of products and/or services, before considering administrative overhead.

Selling, General And Administrative Expenses are costs associated with the sale and delivery of products and the general costs associated with the operation and management of a business, other than those charged to cost of goods sold

Income From Operations is another measure of profitability, equal to gross profit less selling, general and administrative overhead costs.

Other Income (Expense) arises from transactions not related directly to the primary operations of the business. Items frequently reported in this non-operating category are dividend income, interest income and other items such as gains or losses from sale of long-lived assets.

Interest Expense refers to interest paid periodically during the term of it loan by a borrower to the lender for the use of money Interest expense must be separately stated, usually as it subcategory of other income (expense).

Provision for Income Taxes is an estimate of the amount of income tax that will eventually be paid, or has been paid, on the reported earnings.

Extraordinary Items are income or losses of any unusual or infrequent nature.

Net income is the “bottom line” measure of the earnings performance of the company for the period reported on, after considering all elements of income and expense.