Income Statement

A report that measures the success of a company's operations for a given period of time.

Helps evaluate the past performance of a company, provides a basis for predicting future performance, helps assess the risk or uncertainty of achieving future cash flows.

Companies omit items from the income statement that they cannot measure reliably, income numbers are affected by the accounting methods employed.
Income measurement involves judgment.

the planned timing of revenues, expenses, gains and losses to smooth out bumps in earnings. In most cases, used to increase income for a current year at the expense of another year(s). "Popping the cork in a bottle of wine before it is ready."

Whether or not the earnings reports are useful and truthful. Can be distorted if earnings management affects earnings too much.

Focuses on the income-related activities that have occurred during the period. Is the normally used system, but the capital maintenance approach is a common alternative.

A company determines income for the period based on the change in equity, after adjusting for capital contributions or dividends.

Consists of just two groupings in the income statement: revenues and expenses. Expenses are simply taken from revenues to arrive at the Net income. Frequently companies put income tax expense in as an expense, but use the numbers before income tax to determine the tax.

It is a simple, easy to understand presentation. Also there is not any implication that one type of revenue or expense has priority over the other.

Separates the operating and non-operating activities. Also classifies expenses by function (merchandising, selling, administration), this permits comparison between years.

A report of the revenues and expenses of the company's principal operation.
a)Sales or revenue section
(a subsection presenting sales, discounts, allowances, returns, and other related info. Its purpose is to arrive at the net amount of sales revenue.)
b)Cost of Goods Sold section
c)Selling Expenses
d)Administrative or General expenses

Non-operating Section: A report of revenues and expenses resulting from secondary or auxiliary activities of the company. Also special gains and losses that are either infrequent or unusual(not both).
a)Other revenues and gains
A list of the revenues earned or gains incurred generally net of related expenses, from nonoperating transactions.
b)Other expenses and losses
A list of the expenses or losses incurred, generally net of any related incomes, from nonoperating transactions.

A short section reporting federal and state taxes levied on income from continuing operations.

Material gains or losses resulting from the disposition of a segment of the business.

Unusual and infrequent material gains and losses.

Last section of the multistep I/S. ***MUST BE INCLUDED ON THE FACE OF THE INCOME STATEMENT***

Argument that the most useful income measure reflects only regular and recurring elements, therefore irregular items do not reflect a company's future earning power.

Required method of reporting. Includes most items, including irregular ones, as part of net income.

Discontinued operations
extraordinary items
unusual gains and losses
changes in accounting principle
changes in estimates
corrections of erros

2 components
a)a company eliminates the results of operations and cash flows of a component from its ongoing operations.
b)there is no significant continuing involvement in that component after the disposal transaction.

Nonrecurring material items that differ significantly from a company's typical business activities.
***MUST BE BOTH INFREQUENT AND UNUSUAL***

Items that are either infrequent or unusual, but not both.

By making a retrospective adjustment to the financial statements.

They are only used to handle current period accounting. Additionally, they are not handled retrospectively, that is not carried back. They are not considered errors or extraordinary items.

They are treated as prior period adjustments, as are changes in accounting principles. Additionally they are recorded in the year in which they are discovered. Restate the financials if comparative financials are prepared.

(Net Income-Preferred dividends)/Weighted average of common shares outstanding. ***MUST BE ON THE FACE OF THE I/S***

all changes in equity during a period EXCEPT those resulting from investments by owners and distributions. Therefore, includes all: revenues and gains, expenses and losses reported in NI, and all gains and losses that bypass net income but affect stockholders' equity.