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The Income Statement

Income Statement Overview

The income statement presents the results of a business for a stated period of time. The statement begins with revenues, from which expenses are subtracted to arrive at a profit or loss. The income statement is an essential part of the financial statements that an organization releases. The other parts of the financial statements are the balance sheet and statement of cash flows.

The income statement may be presented by itself on a single page, or it may be combined with other comprehensive income information. In the latter case, the report format is called a statement of comprehensive income.

There is no required template in the accounting standards for how the income statement is to be presented. Instead, common usage dictates several possible formats, which typically include some or all of the following line items:

Revenue
Tax expense
Post-tax profit or loss for discontinued operations and for the disposal of these operations
Profit or loss
Extraordinary gains or losses
Other comprehensive income, subdivided into each component thereof
Total comprehensive income

When presenting information in the income statement, the focus should be on providing information in a manner that maximizes information relevance to the reader. This may mean that the best presentation is one in which the format reveals expenses by their nature, as shown in the following example:

Revenue		XXX
Expenses:
Change in finished goods inventories	XXX
Raw materials used	XXX
Employee benefits expense	XXX
Depreciation expense	XXX
Telephone expense	XXX
Other expenses	XXX
Total expenses		XXX
Profit before tax		XXX

However, relevance to the reader may dictate that a better approach is to present expenses by function, in which case the layout changes to something similar to the following example:

Revenue	XXX
Cost of sales	XXX
Gross profit	XXX
Administrative expenses	XXX
Distribution expenses	XXX
Research and development expenses	XXX
Other expenses	XXX
Total expenses	XXX
Profit before tax	XXX

Of the presentation methods just described, showing expenses by their nature is the simplest to account for, since it involves no allocations of expenses between segments of the business. However, showing expenses by their function makes it easier to determine where costs are consumed within an organization, and so contributes to the control of costs.

It is useful to include in either form of presentation however many aggregated line items and subtotals are necessary to most clearly convey to the reader the financial performance of the reporting entity.

Detailed Income Statement Example

The Hegemony Toy Company presents its results in two statements by their nature, resulting in the following format, beginning with the income statement:

Hegemony Toy Company
Income Statement
For the years ended December 31

(000s)	20x2	20x1
Revenue	$1,000,000	$800,000
Other income	10,000	15,000
Changes in finished goods inventories	(320,000)	(205,000)
Raw materials used	(70,000)	(80,000)
Employee benefits expense	(150,000)	(210,000)
Depreciation and amortization expense	(120,000)	(105,000)
Impairment of property, plant, and equipment	0	(35,000)
Other expenses	(55,000)	(61,000)
Finance costs	(19,000)	(20,000)
Profit before tax	276,000	99,000
Income tax expense	(95,000)	(35,000)
Profit for the year from continuing operations	181,000	64,000
Loss for the year from discontinued operations	(35,000)	0
PROFIT FOR THE YEAR	$146,000	$64,000

Earnings per share:
Basic	$0.15	$0.11
Diluted	0.07	0.08

Hegemony then adds on the following statement of comprehensive income:

Hegemony Toy Company
Statement of Comprehensive Income

(000s)	20x2	20x1
Profit for the year	$146,000	$64,000
Other comprehensive income:
Exchange differences on translating foreign operations	12,000	11,000
Available-for-sale financial assets	5,000	(2,000)
Actuarial losses on defined benefit pension plan	(1,000)	(5,000)
Other comprehensive income, net of tax	16,000	4,000
TOTAL COMPREHENSIVE INCOME	162,000	68,000

Similar Terms

The income statement is also known as the profit and loss statement or P&L.