Definitions Of An Income Statement

Reports revenues and expenses for a specific period of time. A firm's revenues, gains, expenses and losses are listed on the income statement. Revenue is money earned from a company’s

Income statements generally report on a period matching the standard accounting periods of the business, or may cover a specific period as defined for research purposes. At the core, the income statement provides a key measure of the profitability of a business. This differs from the liquidity or cash on hand of a business, but instead examines the business’ ability to bring in revenues that exceed expenses over a given period of time (Hofstrand, 2009).

According to Kimmel, Kieso and Waygandt (2011), "the revenue recognition principle requires that companies recognize revenue in the accounting period in which it is earned." Basically, this means that revenues should be recognized (or in other words recorded) on completion of the process of revenue generation i.e. once revenue has been earned. This is as per the accrual basis of accounting. Essentially, revenue recognition derives its significance from its utilization when it comes to the determination of the specific accounting period in which earnings should be recorded.

2013). In most cases, accrual basis net income provides a better measure of performance than net operating income cash flow. As stated by newspaper article, very small companies start out by using the cash basis (Anonymous 2011). The article also states it is easier for them to track cash flow which is the lifeblood of a company. Cantu states, “The first downside is that cash accounting can make operations appear financially healthier than they are.” Her example states, a contractor gets a $20,000 remodeling job and orders $8, 000 worth of supplies on credit. He starts the job on March 1 and receives a $5,000 deposit before beginning his work. With cash accounting, it appears that he has made $5,000 revenue in March. Despite appearances of being in the black, he is actually in the red $3,000 because he still has to pay for his supplies. Another problem, with cash accounting Cantu states, it is easy to confuse cash flow with profit, "If producers are able to pay their bills, many assume that they are making a profit, when actually they 're just experiencing cash flow," Bevers says. "True profit occurs when a producer has paid all of the expenses including depreciation and has built wealth." The text book also supports the fact that net operating cash flow may not

1. For a company, this is the total amount of money received by the company for goods sold or services provided during a certain time period. It also includes all net sales, exchange of assets; interest and any other increase in owner 's equity and is calculated before any expenses are subtracted. Net income can be calculated by subtracting expenses from revenue. In terms of reporting revenue in a company 's financial statements, different companies consider revenue to be received, or "recognized", different ways. For example, revenue could be recognized when a deal is signed, when the money is received, when the services are provided, or at other times. There are rules specifying when revenue should be recognized in different

The purpose of the income statement is to show the revenue accounts and expense accounts within the organization. Typically, for accounting purposes, the revenue and expense line items are designated into two main categories. One category is for operating revenues/expenses that are accrued via normal business operations. The other category is for subsidiary revenues/expenses that are accrued via secondary business operations that are not related to the main operations of the business.

“An income statement measures the performance over some period of time, usually a quarter or a year”, states the authors of Essentials of Corporate Finance. (Ross, Westerfield, Bradford 2014, p. 27). There are three aspects of an income statement that a financial manager needs to keep in mind when analyzing the numbers; GAAP, cash versus noncash item, and time and costs. GAAP will show revenue when it accrues. According to the authors of Essentials of Corporate Finance, “The general rule is to recognize revenue when the earnings process is virtually complete and the value of an exchanges of goods or services is known or can be reliably determined” (Ross, Westerfield, Bradford 2014 p. 28). As some production costs of items produced are made on credit, the revenue on that item will not be recognized until the sale of that item occurs; any other costs incurred in assembling that product will also not be recognized until the time of its sale (Ross, Westerfield, Bradford 2014 p.28- 29). With this situation occurring, the income statement might not be able to represent all the

The net income is actually considerably different from the operating cash flow for multiple reasons. The first reason is non-cash expenses; these type of expenses are items such as depreciation or devaluing of something that was previously of higher value. Amortization of intangible assets, which is the steady reduction in recorded value of an intangible asset over time. These types of expenses truly do not require cash; outlays reduce net earnings but do not affect net cash outflow. Another imperative reason is that many timing differences occurring between the identification of revenue and expense and the incident of the underlying cash flow. In conclusion, the none operating losses and gains are used in the determination of net income, however, the associated cash flows are then classified as financing and investing activities, and they do not include operating activities.

According to Hermanson, R., Maher, M., & Edwards, J. by definition an income statement “is a financial statement that shows cases a companies’ profitability during a set period”. How that profitability is measure is by comparing the revenues earned with the expenses incurred to produce these revenues. If the production of these revenues exceed the expenses that they incurred than the company has gained a net income and if the expenses incur were to exceed the revenue than the company has suffered a net loss.

Revenue recognition issues are the subjects of headlines in our daily newspapers, primarily because major corporations have recognized revenues that did not meet its revenue recognition rule. For businesses that use cash basis accounting, revenue recognition is a simple process; a sale equals revenue, but not for companies that use accrual basis accounting.  The more complex the business, the more specialized the industry, the more difficult the decision becomes for that business as to when to recognize earnings. Revenue recognition is one of the areas where managers can exercise their accounting discretion to achieve certain objectives. By looking at

According to the realization principle the income should be recognized when the earnings process is complete or virtually complete, an exchange transaction has taken place and revenue is measurable (Schroeder, Clark & Cathey, 2013). In other words, revenues

c) Cash flow: Expenses such as depreciation are not cash flows and are therefore not relevant. Similarly, the book value of existing equipment is irrelevant, but the disposal value is relevant.

Income statement refers to the financial statement that helps in evaluating a company 's financial progress over a particular accounting period (Robinson, 2009). The financial progress of a particular company is evaluated by providing a summary of the manner in which the business sustains its revenues and expenses through operating and non-operating undertakings. An income statement also indicates the net profit or loss suffered over a particular accounting period, usually over a financial quarter or year (Robinson, 2009).

Accrual Basis ­ Method of ACCOUNTING that recognizes REVENUE when earned, rather than when  collected. Expenses are recognized when incurred rather than when paid.  Accumulated Depreciation ­ Total DEPRECIATION pertaining to an ASSET or group of assets from  the time the assets were placed in services until the date of the FINANCIAL STATEMENT or tax return.  This total is the CONTRA ACCOUNT to the related asset account.  Additional Paid in Capital ­ Amounts paid for stock in excess of its PAR VALUE or STATED VALUE.  Also, other amounts paid by stockholders and charged to EQUITY ACCOUNTS other than CAPITAL  STOCK.  Adjusted Basis ­ After a taxpayer 's basis in property is determined, it must be adjusted upward to  include any additions of capital to the property and reduced by any returns of capital to the taxpayer.  Additions might include improvements to the property and subtractions may include depreciation or  depletion. A taxpayer 's adjusted basis in property is deducted from the amount realized to find the gain  or loss on sale or disposition.  Adjusted Gross Income ­ Gross income reduced by business and other specified expenses of  individual taxpayers. The amount of adjusted gross income affects the extent to which medical  expenses, non business casualty and theft losses and charitable contributions may be deductible. It is  also an important figure in the basis of many other individual planning issues as

Besides, businesses depreciate long-term assets for both tax and accounting purposes. For accounting purpose, depreciation indicates how much of an asset’s value has been used up. For tax purposes, businesses can deduct the cost of the tangible assets they purchase as business expenses. Depreciation is a non-cash expense. In addition, depreciation is used in accounting to try to match the expense of an asset to the income that the asset helps the company earn. For example, if a