Week 2 Income Statement
Income Statement
Here is a typical income statement we will use for illustration:
| For the Period Ending December 31 | |||||
| 2016 | 2015 | 2014 | 2013 | ||
| Retail Sales | $2,200,00 | $2,000,000 | $1,720,000 | $1,500,000 | |
| Corporate Sales | $1,000,000 | $1,000,000 | $1,100,000 | $1,200,000 | |
| Total Sales Revenue | $3,200,000 | $3,000,000 | $2,820,000 | $2,700,000 | |
| Less: Cost of Goods Sold | $1,600,000 | $1,550,000 | $1,400,000 | $1,300,000 | |
| Gross Profit | $1,600,000 | $1,450,000 | $1,420,000 | $1,400,000 | |
| Less: Operating Expenses | $800,000 | $810,000 | $812,000 | $805,000 | |
| Deprecation Expense | $42,500 | $44,500 | $45,500 | $42,500 | |
| Earnings before Interest and Taxes | $757,500 | $595,500 | $562,500 | $552,500 | |
| Less: Interest Expense | $110,000 | $110,000 | $150,000 | $150,000 | |
| Earnings before Income Tax | $647,500 | $485,500 | $412,500 | $402,500 | |
| Less: Income Tax | $300,000 | $194,200 | $165,000 | $161,000 | |
| Net Income | $347,500 | $291,300 | $247,500 | $241,500 | |
Table: Amalgamated Hat Rack Multiperiod Income Statement. Updated 2016.
Reference: Adapted from Finance for Managers, Harvard Business Essentials (2002)
The income statement describes a company's profit and loss during a particular period. It shows how much revenue came into the business vs. how much in expenses left the business during the period in question. A detail to remember is that in the accrual accounting system revenues and expenses are not the same as Cash Flows. These occur when cash moves in and out of the firm (e.g., when money is received from sales, when bills are paid, when assets are bought or sold, or when money is borrowed or received from a stock issue)
| Revenues | Expenses |
|
This is an accounting term referring to income the firm receives when a sale is made. Revenues are not necessarily cash |
This is an accounting term referring to amounts spent (usually) for things that can't be stored (like electricity). |
Important Note: The amounts spent for things that can be stored and used later are (usually) recorded on the balance sheet, not the income statement. For example, your firm bought some lumber in 2015 and you still have it. The amount is not logged as an expense on the 2015 income statement even though you paid for the lumber in full in 2015. Accountants would say that buying lumber is not an expense. What you actually did was trade cash for another asset (lumber in this case).
Typical Income Statement Accounts
The following are examples of typical income statement accounts:
- Revenues
- Cost of Goods Sold (COGS)
- Operating Expenses
- Depreciation
- Operating Profit (also called Earnings before Interest and Taxes, or EBIT)
- Interest Expense
- Before-Tax Income (also called Earnings Before Tax, or EBT
- Taxes (State & Local)
- Net Income (also called Net Profit After-Tax, or Net After-Tax Earnings)
- Preferred dividends (if any; if not, this account will not be shown)
- Earnings available to common stockholders (same as net income if there is no preferred)
- EPS
- Dividends
- Addition to Retained Earnings
Recall the transaction in which you bought the lumber in 2015 that you still have. The transaction itself won't show up on either the income statement or the balance sheet. Your Dec 31, 2014 balance sheet would show the cash on hand, and the Dec 31, 2015 balance sheet would show the lumber on hand. There is no place on either the income statement or the balance sheets to record the transaction itself, when the cash was traded for the lumber. So, to completely describe what is going on in a firm you need a third financial statement, which is—Cash Flows.