Financial Reporting and Analysis II
Reading 21. Understanding Income Statements
Learning Outcome Statements
a. describe the components of the income statement and alternative presentation formats of that statement;
CFA Curriculum, 2020, Volume 3
Subject 1. Components and Format of the Income Statement
Here are common components:
- Sales or revenue: amount charged for the delivery of goods or services.
- Follows the revenue recognition rule: Revenue is recognized even though cash may not be collected until the following accounting period.
- Net sales = gross sales - sales returns and allowances - discounts.
- Amount of sales and trends in net sales over time are used to analyze a company's progress.
- Cost of goods sold is the amount paid for merchandise sold, or the cost to manufacture products that were sold, during an accounting period.
- Gross margin = net sales - costs of goods sold. Also called gross profit.
- The amount of gross margin; and
- The percentage of gross margin (gross margin/net sales).
- Operating expenses are expenses other than the cost of goods sold that are incurred in running a business.
- These expenses are grouped into categories: selling expenses, general and administrative expenses, and other revenues and expenses.
- Careful planning and control of operating expenses can improve a company's profitability.
- Income from operations (also called operating income) is the difference between gross margin and operating expenses. It represents the income from a company's normal, or main, business. It is used to compare the profitability of companies or divisions within a company.
- Other revenues and expenses are not part of a company's operating activities. These include:
- Revenues or expenses from investments (e.g., dividends and interest).
- Interest and other expenses from borrowing.
- Any other revenue or expense not related to the company's normal business operations.
- Income before income taxes is the amount a company has earned from all activities - operating and non-operating - before taking into account the amount of income taxes the company incurred.
- Income taxes (also called provision for income taxes) represent the expense for federal, state, and local taxes on corporate income.
- Net income is what remains of the gross margin after operating expenses are deducted, other revenues and expenses are added or deducted, and income taxes are deducted. It is the final figure, or "bottom line," of the income statement.
Net income = Income before income taxes - income taxes
- It represents the amount of business earnings that accrue to stockholders.
- It is the amount transferred to retained earnings from all income generating activities during the year.
- It is often used to determine whether a business has been operating successfully.
The following is a sample income statement for company XYZ for fiscal years ending 2006 and 2007 (expenses are in parentheses).
|Income Statement For Company XYZ FY 2006 and 2007|
|Cost of Sales||(350,000)||(375,000)|
|Operating Expenses (SG&A)||(235,000)||(260,000)|
|Other Income (Expense)||40,000||60,000|
|Extraordinary Gain (Loss)||-||(15,000)|
|Net Profit Before Taxes (Pretax Income)||905,000||1,360,000|
User Contributed Comments 22You need to log in first to add your comment.
i say good too.
I like it.
It is easy to understand
simple, concise and easy to comprehend. thanks
it is simple and concise
not knowing accounting at all that cleared up a lot...
clear, but whether this is comprehensive?
Isn't extraordinary items after income from ops, net of tax
very good to understand
I hate accounting. That was a great simple first lesson.
Yeah isn't extraordinary items after income from operations???
Net of taxes !!
what is the meaning of exraordinary items
So Net sales could also = allowances - discounts? and where do you find allowances and discounts?
emmaejhu, extraordinary items are rare and infrequent gains and losses
well explained and made simple to understand
Easy to understand