Income Statement

What is the Income Statement?

• Income statement, now called “Statement of
Comprehensive Income”, details the revenues earned
and the expenses incurred by a company.
• It shows the results of operation of a company.
• The “Bottom Line” in business Parlance is the net profit
or the net loss.
• If a company is “in the red “, it means that the company
is incurring a net loss of the business.
• Income statement shows the profitability of the firm.
• It covers a certain accounting period, a month, a quarter,
a six-month period, or a year.
• Yearly audited financial statements are submitted to the
SEC.
For a Service Enterprise
the income statement is very simple.
It simply lists the income from operations, like service revenue
or professional fees, and deducts from such revenue the total
operating expenses.
Certainly, if the income is greater than the operating expenses, it
will result in an operating profit.
On the order hand, if the income is less than the operating
expenses, the result is an operating loss.
To the operating profit or loss is added the net of the other
income (interest income, rent income, commission income,
among others) less the other expenses (interest expense, finance
charges, among others).
A sample of income statement of a service firm is shown below:
 EVERCLEAN LAUNDRY
Income Statement

For the Year Ended December 31, 2017

Laundry Revenue P232,400

Operating Expenses:
Cleaning Supplies Expense P12,350
Cleaning Equipment P18,240
Repair
Utilities Expense P22,160
Rent Expense P48,000
Salaries Expense P40,500
Office Supplies Expense P10,220
Delivery Expense P15,230
Miscellaneous Expenses P8,280 P174,980
Operating Profit P57,420
Other Income
Interest Income P5,000
Other Expenses
Interest Expense (P8,000) (P3,000)
NET PROFIT P54,420
Income Statement by Nature of Expense

The expenses in an income statement are either classified by their nature or by their function. An
income statement by nature method is the one in which expenses are disclosed according to their
nature such as depreciation, transports costs, rent expense, wages and salaries etc. There is no
reallocation of these expenses to different functions of the entity (i.e. cost of goods sold, selling costs,
administrative costs and other expenses).

This method of disclosure of expenses is used in single step income statement and it is usually
employed by small businesses due to its simplicity. However there is drawback in this method that it
cannot be used to calculate gross profit within the income statement.
The following example shows the format of an income statement by nature.
Company A
Income Statement
For the Year Ended June 31, 2011

Sales $305,610
Expenses:
Beginning Inventory $16,800
Purchases 184,100
Ending Inventory −21,050
Depreciation Expense 14,790
Rent Expense 21,000
Salaries and Wages Expense 38,320
Supplies Expense 3,510
Utilities Expense 6,900
Interest Expense 375
Total Expenses −264,745
Net Income $40,865
Income Statement by Function of Expense

An income statement by function is the one in which expenses are disclosed according to their
functions such are cost of goods sold, selling expenses, administrative expenses, other
expenses/losses etc. This method allows us to calculate gross profit and operating profit within the
income statement and therefore it is usually used in the multi-step format of income statement. Most
large and medium sized businesses use the function method of expense disclosure.

The use of function method to disclose expenses still requires us to disclose the individual expenses by
nature method under each function either on the face of the income statement or in the notes to the
income statement.

The following example shows the format of an income statement by function of expense.
Company A
Income Statement
For the Year Ended June 31, 2011

Sales $789,160
Cost of Goods Sold −445,940
Gross Profit $343,220
Operating Expenses:
Selling Expenses $109,310
Administrative Expenses 127,270
Total Operating Expenses −236,580
Operating Income $106,640
Other Incomes/Expenses:
Gain on Sale of Equipment $3,570
Interest Expense −1,150
Net Other Incomes/Expenses: 2,420
Net Income $104,220