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The Income Statement

Income Statement Overview

The income statement is an integral part of an entity's financial statements, and contains the results of its operations during an accounting period, showing revenues and expenses, and the resulting profit or loss.

There are two ways to present the income statement. One method is to present all items of revenue and expense for the reporting period in a statement of comprehensive income. Alternatively, you can split this information into an income statement and a statement of comprehensive income.

There are no specific requirements for the line items to include in the income statement, but the following line items are typically used, based on general practice:

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

A key additional item is to present an analysis of the expenses in profit or loss, using a classification based on their nature or functional area, maximizing the relevance and reliability of presented information. If you elect to present expenses by their nature, the format looks similar to the following:

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

Alternatively, if you present expenses by their functional area, the format looks similar to the following:

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 two methods, presenting expenses by their nature is easier, since it requires no allocation of expenses between functional areas. Conversely, the functional area presentation may be more relevant to users of the information, who can more easily see where resources are being consumed.

You should add additional headings, subtotals, and line items to the items noted above if doing so will increase a user’s understanding of the entity’s financial performance. Here is an example.

Detailed Income Statement Example

Plasma Storage Devices presents its results in two statements by their nature, resulting in the following format, beginning with the income statement:

Plasma Storage Devices
Income Statement
For the years ended December 31

(000s)	20x2	20x1
Revenue	$900,000	$850,000
Other income	25,000	20,000
Changes in finished goods inventories	(270,000)	(255,000)
Raw materials used	(90,000)	(85,000)
Employee benefits expense	(180,000)	(170,000)
Depreciation and amortization expense	(135,000)	(125,000)
Impairment of property, plant, and equipment	0	(50,000)
Other expenses	(75,000)	(72,000)
Finance costs	(29,000)	(23,000)
Profit before tax	146,000	90,000
Income tax expense	(58,000)	(32,000)
Profit for the year from continuing operations	88,000	58,000
Loss for the year from discontinued operations	(42,000)	0
PROFIT FOR THE YEAR	$46,000	$58,000

Earnings per share:
Basic	$0.13	$0.16
Diluted	0.09	0.10

Plasma Storage Devices then continues with the following statement of comprehensive income:

Plasma Storage Devices
Statement of Comprehensive Income

(000s)	20x2	20x1
Profit for the year	$46,000	$58,000
Other comprehensive income:
Exchange differences on translating foreign operations	5,000	9,000
Available-for-sale financial assets	10,000	(2,000)
Actuarial losses on defined benefit pension plan	(2,000)	(2,000)
Other comprehensive income, net of tax	13,000	5,000
TOTAL COMPREHENSIVE INCOME	59,000	63,000

Similar Terms

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