income statement

• Lists sources of revenues generated

and expenses incurred during a period
• Including the main elements:
– Revenues
– Expenses
– Net Income
 formats of income statement

• Condensed income statement

• Single step income statement

• Multistep Income statement

 Single-step and and Multiple-step
Income Statements
 Single-step – total revenues minus
total expenses; simple, easy to read
 Multi-step – highlights components
and distinguishes activities
Single-step Income Statement
Multi-step Income Statement
 revenue
• Revenue is the price of goods sold
and services rendered during a
given accounting period
• Revenues represent actual or
expected cash inflows
• Reflects the increases in assets of
an entity or settlements of its
liabilities
 expenses
• Expenses are the cost of the goods
and services used up in the process of
earning revenue
• Expenses represent actual or
expected cash outflows
• Expenses incur in form of assets that
flow out or are used up or liabilities
that are incurred
 Expanded Accounting Equation

Assets = Liabilities + Owner’s Equity [+revenues – expenses]

 practices
• P1-31B, P1-27A

9
 realization principle and revenue
recognition
• A business should record when it is
“earned”, without regard as to when the
cash is received
• Two criteria for recognition
– Revenue must have been earned
– Level of revenue must be measurable
 matching principle and expenses
recognition

• In measuring net income for a period,

revenue should be offset by all the
expenses incurred in producing that
revenue
• The question of in what period will this
expenditure help to produce revenue?
 Study of annual reports
• Types of revenues and how they are
recognized?
• Comments on the expenses structure

12
 Evaluating Profitability

• Gross Profit Rate

• Profit Margin Ratio
Gross Profit Rate

Gross Profit
=
Net Sales
 Reasons Gross Profits Rates Change

•Selling products with a lower “mark-up”

• Increased competition can lower sale prices

•Paying higher prices to suppliers
15
 Profit Margin Ratio

Net Income
=
Net Sales

Percentage of “mark-up” on merchandise

sold alters this percentage
Evaluate Profits Margins

17
 TEAMWORK
• Article “revenue – the issue is
recognition” and “False Transaction”
• Discuss
– Issues in recognizing and reporting of
income
– The importance of information of reported
income to financial performance
– Management behavior in income recognition
– Lessons to readers of financial statements