As you have already learned about different financial statements, having some prior knowledge of income statement will help you greatly in going some extra miles in getting on with income statement. This is the statement that provides the profit or, loss of that accounting period. It is a common practice all over the world that different companies maintain many subsidiary accounts to get to the balances what are needed to constitute the income statement. As for the present condition some common examples can be— Payroll accounts, Manufacturing accounts, Materials accounts etc. So, income statement is one compact place where balances of different subsidiaries are put in to derive the final balance. (check out: Balance sheet format in accounting : American & British)
It is the first of the financial statements. It provides the unique position where anybody concerned can take a peek at the statement and get to measure the other factors he/she may need. For example we may learn the inventory turnover ratio, gross profit ratio etc. These are helpful to the manager of the entity as he may get an idea where he has to reach or, what his inventory level should be at any given time of the accounting year given that inventory is considered as “Idle asset” and that is considered as “Evil”.
Income statement is classified in two categories and they are:
– Single step income statement,
– Multiple step income statement.
This income statement is the one which just takes into account all the revenues and expenses as only in broad categories. They are not sub-divided into their other categories what is done in multiple step income statement.
Single step income statement isn’t in that much of a use now-a-days. Since it doesn’t categorize into different expenses and revenues, it doesn’t help very much to derive a decision.
In a single step income statement the preparer takes all the revenues irrespective of sales or, operating and puts them straight into the income statement. Same goes for the expenses. In this process the subsidiaries remain the same. Since it is only one statement, it provides only Net income or, Net loss. No Gross income or, Gross loss.
Whenever the income statement turns into one multiple step one then there comes the classification of revenues and expenditures. The classifications stay as:
– Sales revenue
– Cost of goods sold/ Manufacturing expenses
– Operating expenses
– Operating revenue
As it has two different categories for the revenues and expenditures, the result is also two fold. They are:
– Sales revenue less manufacturing expenses is the Gross income/ Gross loss,
– Operating income less operating expenses is the Net income/ Net loss.
In this income statement net income has impacts from tax and interest. So, the net income usually turns out to be Net Income After Tax And Interest (NIATI). This method is widely accepted and highly popular while calculating different ratios and some of them are cross statement based. For better knowledge please review the ratio section. ( Ratio Analysis Formulas and Examples )
Last but not the least income statement, in fact all the financial statements, is prepared under IAS 1.
And another important information which may have grabbed many of your attention at the top is the name “Statement of comprehensive income” is that the name has been changed. And the name turns out to be Statement of Comprehensive Income after 2007.