Income Statement Presentation
Note: Income Statement Format
Hanna
2004-08-03
Income Statement Presentation
The objective of studying the format and presentation of the income statement is to gain an understanding of the different ways that certain economic events can be presented. Sometimes, the type of presentation depends upon management's intent regarding the future. Needless to say, there is a lot of room for the application of judgment when choosing amongst various acceptable income statement formats. Interpreting the income statement requires users to have an appreciation for where this judgment has the potential to affect their decision. At the most rudimentary level, we expect the income statement to portray revenues and expenses, and to report the difference between these two numbers as the resulting income or loss. Expenses may be broken out between those that are inventoried (e.g., direct materials, direct labor, manufacturing overhead), and those that are recognized as incurred (e.g., selling, general and administrative costs). An example of a simple income statement for a single year would be as follows:
Sales revenue: Cost of goods sold: Gross margin Less: Selling, general and administrative expenses Tax expense Net income $ 32,000 28,000 4,000 2,750 500 $ 750
Often, much more detail is provided regarding the sources of revenues and the types of expenses. This presentation is appropriate for assessing the performance of the period covered by the income statement, but our interest in knowing income extends beyond simply assessing the past period's performance. Another important use of the income number is to help predict a firm's future performance. In apparent acknowledgment of this fact, the accounting rules require three types of transactions to be presented differently than in the simple example above. The three types of transactions that are presented differently are extraordinary items, discontinued operations, and changes in accounting policy. The events that
Hanna
2004-08-03
Income Statement Presentation
The objective of studying the format and presentation of the income statement is to gain an understanding of the different ways that certain economic events can be presented. Sometimes, the type of presentation depends upon management's intent regarding the future. Needless to say, there is a lot of room for the application of judgment when choosing amongst various acceptable income statement formats. Interpreting the income statement requires users to have an appreciation for where this judgment has the potential to affect their decision. At the most rudimentary level, we expect the income statement to portray revenues and expenses, and to report the difference between these two numbers as the resulting income or loss. Expenses may be broken out between those that are inventoried (e.g., direct materials, direct labor, manufacturing overhead), and those that are recognized as incurred (e.g., selling, general and administrative costs). An example of a simple income statement for a single year would be as follows:
Sales revenue: Cost of goods sold: Gross margin Less: Selling, general and administrative expenses Tax expense Net income $ 32,000 28,000 4,000 2,750 500 $ 750
Often, much more detail is provided regarding the sources of revenues and the types of expenses. This presentation is appropriate for assessing the performance of the period covered by the income statement, but our interest in knowing income extends beyond simply assessing the past period's performance. Another important use of the income number is to help predict a firm's future performance. In apparent acknowledgment of this fact, the accounting rules require three types of transactions to be presented differently than in the simple example above. The three types of transactions that are presented differently are extraordinary items, discontinued operations, and changes in accounting policy. The events that