Key Takeaways Key Points The income statement consists of revenues and expenses along with the resulting net income or loss over a period of time due to earning activities. The income statement shows investors and management if the firm made money during the period reported.
The operating section of an income statement includes revenue and expenses. Revenue consists of cash inflows or other enhancements of assets of an entity, and expenses consist of cash outflows or other using-up of assets or incurring of liabilities. The non-operating section includes revenues and gains from non-primary business activities, items that are either unusual or infrequent, finance costs like interest expense, and income tax expense.
It is important to investors — also on a per share basis as earnings per share, EPS — as it represents the profit for the accounting period attributable to the shareholders. Key Terms income statement : a calculation which shows the profit or loss of an accounting unit during a specific period of time, providing a summary of how the profit or loss is calculated from gross revenue and expenses gross profit : The difference between net sales and the cost of goods sold.
Limitations of the Income Statement Income statements have several limitations stemming from estimation difficulties, reporting error, and fraud. Learning Objectives Demonstrate how the limitations of the income statement can influence valuation. Key Takeaways Key Points Income statements include judgments and estimates, which mean that items that might be relevant but cannot be reliably measured are not reported and that some reported figures have a subjective component.
With respect to accounting methods, one of the limitations of the income statement is that income is reported based on accounting rules and often does not reflect cash changing hands. Income statements can also be limited by fraud, such as earnings management, which occurs when managers use judgment in financial reporting to intentionally alter financial reports to show an artificial increase or decrease of revenues, profits, or earnings per share figures.
Key Terms matching principle : According to the principle, expenses are recognized when obligations are 1 incurred usually when goods are transferred or services rendered, e. In cash accounting—in contrast—expenses are recognized when cash is paid out. FIFO : Method for for accounting for inventories. FIFO stands for first-in, first-out, and assumes that the oldest inventory items are recorded as sold first. LIFO : Method for accounting for inventory. LIFO stands for last-in, first-out, and assumes that the most recently produced items are recorded as sold first.
Key Takeaways Key Points Items that create temporary differences due to the recording requirements of GAAP include rent or other revenue collected in advance, estimated expenses, and deferred tax liabilities and assets. The four basic principles of GAAP can affect items on the income statement. These principles include the historical cost principle, revenue recognition principle, matching principle, and full disclosure principle.
Key Terms deferred : Of or pertaining to a value that is not realized until a future date, e. Stock Trading. Financial Statements. Tools for Fundamental Analysis. Actively scan device characteristics for identification.
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Shareholder Equity Impact. Real-World Example. Paid creditors on account. Account 1 Account 2 A. Purchased land by issuing a note payable C. Sold merchandise to customers on account. Insurance Expense B. Accounts Receivable C. Office Supplies D. Sales Revenue E. Common Stock F. Notes Payable. Cash decrease B. Supplies increase C. Accounts Payable decrease D.
Common Stock increase E. Accounts Payable increase F. Notes Payable increase. Equipment increase B. Dividends Paid increase C. Repairs Expense increase D. Service revenue increase E.
Miscellaneous Expense increase F. Bonds Payable increase. Notes Payable B. Utilities Expense D. Insurance Expense F. Problem Set A Figure Figure Identify the financial statement on which each of the following account categories would appear: the balance sheet BS , the income statement IS , or the retained earnings statement RE. Issued stock for cash B. Purchased supplies on account C. Paid employee salaries D. Paid note payment to bank E. Collected balance on accounts receivable.
Increase Decrease A. Asset accounts B. Liability accounts C. Common stock D. Revenue E. Normal balance Account type A. Supplies C. Inventory D. Common Stock E. Dividends F. Salaries Expense. Transaction Debit or credit? Problem Set B Figure Figure Identify the financial statement on which each of the following account categories would appear: the balance sheet BS , the income statement IS , or the retained earnings statement RE.
Transaction Impact 1 Impact 2 A. Paid balance due for accounts payable B. However, the transaction differs because the company has not received cash. Instead, the company has received another asset, an account receivable.
As noted earlier, an account receivable is the amount due from a customer for goods or services already provided. The company has a legal right to collect from the customer in the future. Accounting recognizes such claims as assets. The accounting equation, including this USD item, is as follows:. Metro collected USD on account from the customer in transaction 2b. The customer will pay the remaining USD later. This transaction affects only the balance sheet and consists of giving up a claim on a customer in exchange for cash.
Note that this transaction consists solely of a change in the composition of the assets. When the company performed the services, it recorded the revenue.
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