INCOME STATEMENT

An income statement (US English) or profit and loss account (UK English) (also

referred to as a profit and loss statement (P&L),revenue statement, statement of

financial performance, earnings statement, operating statement, or statement of

operations) is one of the financial statements of a company and shows the

company’s revenues and expenses during a particular period. It indicates how the

revenues (money received from the sale of products and services before expenses

are taken out, also known as the “top line”) are transformed into the net

income (the result after all revenues and expenses have been accounted for, also

known as “net profit” or the “bottom line”). It displays the revenues recognized for

a specific period, and the cost and expenses charged against these revenues,

including write-offs (e.g., depreciation and amortization of various assets)

and taxes. The purpose of the income statement is to

show managers and investors whether the company made or lost money during the

period being reported.

One important thing to remember about an income statement is that it represents a

period of time like the cash flow statement. This contrasts with the balance sheet,

which represents a single moment in time.

Charitable organizations that are required to publish financial statements do not

produce an income statement. Instead, they produce a similar statement that

reflects funding sources compared against program expenses, administrative costs,

and other operating commitments. This statement is commonly referred to as

the statement of activities. Revenues and expenses are further categorized in the

statement of activities by the donor restrictions on the funds received and

expended.

The income statement can be prepared in one of two methods. The Single Step

income statement takes a simpler approach, totaling revenues and subtracting

expenses to find the bottom line. The more complex Multi-Step income statement

(as the name implies) takes several steps to find the bottom line, starting with

the gross profit. It then calculates operating expenses and, when deducted from the

gross profit, yields income from operations. Adding to income from operations is

the difference of other revenues and other expenses. When combined with income

from operations, this yields income before taxes. The final step is to deduct taxes,

which finally produces the net income for the period measured.

The Profit and Loss account summarises a firm's trading results over a period of

time and shows how the resulting profits were used, or how the losses were

financed. The profit and loss account tends to have more value to the managers

of the firm than the balance sheet which is directed more at those outside

reviewing the firm. It covers the profits and losses usually over a period of a

year, larger businesses often produce them half yearly or quarterly.

The main features of a profit and loss account are:

1. Sales revenue less costs = profit

This is the basic equation that underpins the profit and loss account. Revenue

can cover a wide range of activities, sales receipts, investments, cash

transactions, etc. Sales revenue excludes any added value tax.

2. Cost of goods sold

This is the first group of subtractions which is about how much it cost you to

produce the goods and services that generated the revenue. It includes all costs

related to the product ( often called production costs). So direct materials,

direct labour, plus all overhead costs that can be allocated to the production

process.

3. Gross profit

This is the sum remaining when you have deducted cost of goods sold from sales

revenue.

4. Next we subtract all other running costs (except the cost of finance). These

relate to the firm rather than the specific product, and are charged for a period

of time ( often called period costs).

Distribution costs include all outlay on selling and marketing

Administrative costs include all remaining overheads including office costs and

management salaries.

5. Operating or trading profit

This is the amount remaining after these deductions. It is the surplus achieved

through a firm's normal trading activity when all operating costs have been

deducted.

6. Non-operating income

Means any earnings arising from outside the firm's normal trading activity. This

might be from financial fixed assets such as payments for investments in other

firms.

7. Interest payable

Payable on the firm's loan finance is deducted next. This is permitted before

profits are subject to any taxation.

8. Profit before tax (also called net profit)

This is the profit remaining and is liable to corporation tax. The rates of tax vary

from year to year and depending on the size of firm.

9. Profit after tax.

They are subject to subtractions/additions arising form extraordinary items,

dividends to preference shareholders, and payment of dividends to minority

interests (such as shareholders outside the firm but with holdings in subsidiary

companies)

The profits remaining are those available for dividends to the Ordinary

shareholders.

Extraordinary items. These are significant but 'one offs', and so are not

predictable or routine in occurrence. For example if a firm has an overseas

branch in a country where the political situation become intolerable and are

forced to sell, the loss on the sale and any stock would be an extraordinary item.

They appear below 'profit after tax'.

10. Dividends

They are recommended by the directors. The ordinary share rate will vary

according to performance. The dividend is agreed by the shareholders at the

annual general meeting. The total distributed profit may be any proportion of

profit after tax, although usually more than half is retained.

11. Retained profit

The part of the final profit that is ploughed back into the firm, this will be

added to the reserves on the balance sheet.

If a firm makes a loss for the period, then it will pay no dividend, and the

reserves will be reduced. This would reflect the real loss of resources (assets)

from the firm. However it is possible that a dividend could still be paid but this

would be from retained profit from previous years.

Exceptional items

These arise from the firms ordinary activities but are unusual in their scale, such

as the bankruptcy of a major customer and debtor. They are deducted before

operating profit and along with other costs. They have to be explained in the

Notes following the balance sheet.

Usefulness and limitations of income statement

Income statements should help investors and creditors determine the past financial

performance of the enterprise, predict future performance, and assess the capability

of generating future cash flows through report of the income and expenses.

However, information of an income statement has several limitations:

Items that might be relevant but cannot be reliably measured are not reported

(e.g. brand recognition and loyalty).

Some numbers depend on accounting methods used (e.g. using FIFO or LIFO

accounting to measure inventory level).

Some numbers depend on judgments and estimates (e.g. depreciation expense

depends on estimated useful life and salvage value).

Guidelines for statements of comprehensive income and income statements of

business entities are formulated by the International Accounting Standards

Board and numerous country-specific organizations, for example the FASB in the

U.S..

Names and usage of different accounts in the income statement depend on the type

of organization, industry practices and the requirements of different jurisdictions.

If applicable to the business, summary values for the following items should be

included in the income statement.

Operating section

Revenue - Cash inflows or other enhancements of assets of an entity during a

period from delivering or producing goods, rendering services, or other

activities that constitute the entity's ongoing major operations. It is usually

presented as sales minus sales discounts, returns, and allowances. Every time a

business sells a product or performs a service, it obtains revenue. This often is

referred to as gross revenue or sales revenue.

Expenses - Cash outflows or other using-up of assets or incurrence of liabilities

during a period from delivering or producing goods, rendering services, or

carrying out other activities that constitute the entity's ongoing major

operations.

Cost of Goods Sold (COGS) / Cost of Sales - represents the direct costs

attributable to goods produced and sold by a business (manufacturing or merchandizing). It includes material costs, direct labour, and overhead

costs (as in absorption costing), and excludes operating costs (period costs) such as selling, administrative, advertising or R&D, etc.

Selling, General and Administrative expenses (SG&A or SGA) - consist of the combined payroll costs. SGA is usually understood as a major portion of non-production related costs, in contrast to production costs such as direct

labour.

Selling expenses - represent expenses needed to sell products (e.g. salaries of sales people, commissions and travel expenses,

advertising, freight, shipping, depreciation of sales store buildings and equipment, etc.).

General and Administrative (G&A) expenses - represent expenses to

manage the business (salaries of officers / executives, legal and professional fees, utilities, insurance, depreciation of office building and

equipment, office rents, office supplies, etc.).

Depreciation / Amortization - the charge with respect to fixed assets / intangible assets that have been capitalised on the balance sheet for a

specific (accounting) period. It is a systematic and rational allocation of cost rather than the recognition of market value decrement.

Research & Development (R&D) expenses - represent expenses included in

research and development.

Expenses recognised in the income statement should be analysed either

by nature (raw materials, transport costs, staffing costs, depreciation, employee

benefit etc.) or by function(cost of sales, selling, administrative, etc.). If an entity

categorises by function, then additional information on the nature of expenses, at

least, – depreciation, amortisation and employee benefits expense – must be

disclosed. The major exclusive of costs of goods sold, are classified as operating

expenses. These represent the resources expended, except for inventory purchases,

in generating the revenue for the period. Expenses often are divided into two broad

sub classicifications selling expenses and administrative expenses.[5]

Non-operating section

Other revenues or gains - revenues and gains from other than primary business

activities (e.g. rent, income from patents, goodwill). It also includes unusual

gains that are either unusual or infrequent, but not both (e.g. gain from sale of

securities or gain from disposal of fixed assets)

Other expenses or losses - expenses or losses not related to primary business

operations, (e.g. foreign exchange loss).

Finance costs - costs of borrowing from various creditors (e.g. interest

expenses, bank charges).

Income tax expense - sum of the amount of tax payable to tax authorities in the

current reporting period (current tax liabilities/ tax payable) and the amount

of deferred tax liabilities (or assets).

Irregular items

They are reported separately because this way users can better predict future cash

flows - irregular items most likely will not recur. These are reported net of taxes.

Discontinued operations is the most common type of irregular items. Shifting

business location(s), stopping production temporarily, or changes due to

technological improvement do not qualify as discontinued operations.

Discontinued operations must be shown separately.

Cumulative effect of changes in accounting policies (principles) is the difference

between the book value of the affected assets (or liabilities) under the old policy

(principle) and what the book value would have been if the new principle had been

applied in the prior periods. For example, valuation of inventories

using LIFO instead of weighted average method. The changes should be

applied retrospectively and shown as adjustments to the beginning balance of

affected components in Equity. All comparative financial statements should be

restated.

However, changes in estimates (e.g. estimated useful life of a fixed asset) only

requires prospective changes. (IAS 8)

No items may be presented in the income statement as extraordinary items under

IFRS regulations, but are permissible under US GAAP. Extraordinary items are

both unusual (abnormal) and infrequent, for example, unexpected natural disaster,

expropriation, prohibitions under new regulations. [Note: natural disaster might not

qualify depending on location (e.g. frost damage would not qualify in Canada but

would in the tropics).]

Additional items may be needed to fairly present the entity's results of operations.

Disclosures

Certain items must be disclosed separately in the notes (or the statement of

comprehensive income), if material, including:

Write-downs of inventories to net realisable value or of property, plant and

equipment to recoverable amount, as well as reversals of such write-downs

Restructurings of the activities of an entity and reversals of any provisions for

the costs of restructuring

Disposals of items of property, plant and equipment

Disposals of investments

Discontinued operations

Litigation settlements

Other reversals of provisions

Earnings per share

Because of its importance, earnings per share (EPS) are required to be disclosed on

the face of the income statement. A company which reports any of the irregular

items must also report EPS for these items either in the statement or in the notes.

There are two forms of EPS reported:

Basic: in this case “weighted average of shares outstanding” includes only

actual stocks outstanding.

Diluted: in this case “weighted average of shares outstanding” is calculated as if

all stock options, warrants, convertible bonds, and other securities that could be

transformed into shares are transformed. This increases the number of shares

and so EPS decreases. Diluted EPS is considered to be a more reliable way to

measure EPS.

Bottom line

“Bottom line” is the net income that is calculated after subtracting the expenses

from revenue. Since this forms the last line of the income statement, it is

informally called “bottom line.” It is important to investors as it represents the

profit for the year attributable to the shareholders.

After revision to IAS 1 in 2003, the Standard is now using profit or loss for the

year rather than net profit or loss or net income as the descriptive term for the

bottom line of the income statement.

Requirements of IFRS

On 6 September 2007, the International Accounting Standards Board issued a

revised IAS 1: Presentation of Financial Statements, which is effective for annual

periods beginning on or after 1 January 2009.

A business entity adopting IFRS must include:

a statement of comprehensive income or

two separate statements comprising:

1. an income statement displaying components of profit or loss and

2. a statement of comprehensive income that begins with profit or loss

(bottom line of the income statement) and displays the items of other comprehensive income for the reporting period.

All non-owner changes in equity (i.e. comprehensive income ) shall be

presented in either in the statement of comprehensive income (or in a separate

income statement and a statement of comprehensive income). Components of

comprehensive income may not be presented in the statement of changes in

equity.

Comprehensive income for a period includes profit or loss (net income) for that

period and other comprehensive income recognised in that period.

All items of income and expense recognised in a period must be included in

profit or loss unless a Standard or an Interpretation requires otherwise. Some

IFRSs require or permit that some components to be excluded from profit or

loss and instead to be included in other comprehensive income. (

Items and disclosures

The statement of comprehensive income should include:

1. Revenue

2. Finance costs (including interest expenses)

3. Share of the profit or loss of associates and joint ventures accounted for

using the equity method

4. Tax expense

5. A single amount comprising the total of (1) the post-tax profit or loss

of discontinued operations and (2) the post-tax gain or loss recognised

on the disposal of the assets or disposal group(s) constituting

the discontinued operation

6. Profit or loss

7. Each component of other comprehensive income classified by nature

8. Share of the other comprehensive income of associates and joint

ventures accounted for using the equity method

9. Total comprehensive income

The following items must also be disclosed in the statement of comprehensive

income as allocations for the period:

Profit or loss for the period attributable to non-controlling interests and

owners of the parent

Total comprehensive income attributable to non-controlling interests and

owners of the parent

No items may be presented in the statement of comprehensive income (or in the

income statement, if separately presented) or in the notes as extraordinary

items.

The income statement is one of the major financial statements used by accountants and business owners. (The other major financial statements are the balance

sheet, statement of cash flows, and the statement of stockholders' equity.) The income statement is sometimes referred to as the profit and loss statement (P&L),

statement of operations, or statement of income. We will use income statement and profit and loss statement throughout this explanation. The income statement is important because it shows the profitability of a company

during the time interval specified in its heading. The period of time that the statement covers is chosen by the business and will vary. For example, the heading

may state: "For the Three Months Ended December 31, 2012" (The period of October 1

through December 31, 2012.) "The Four Weeks Ended December 27, 2012" (The period of November 29

through December 27, 2012.) "The Fiscal Year Ended June 30, 2013" (The period of July 1, 2012 through June

30, 2013.) Keep in mind that the income statement shows revenues, expenses, gains, and

losses; it does not show cash receipts (money you receive) nor cash disbursements (money you pay out).

People pay attention to the profitability of a company for many reasons. For

example, if a company was not able to operate profitably—the bottom line of the income statement indicates a net loss—a banker/lender/creditor may be hesitant to

extend additional credit to the company. On the other hand, a company that has

operated profitably—the bottom line of the income statement indicates a net income—demonstrated its ability to use borrowed and invested funds in a

successful manner. A company's ability to operate profitably is important to current lenders and investors, potential lenders and investors, company

management, competitors, government agencies, labor unions, and others. The format of the income statement or the profit and loss statement will vary

according to the complexity of the business activities. However, most companies will have the following elements in their income statements:

A. Revenues and Gains

1. Revenues from primary activities 2. Revenues or income from secondary activities

3. Gains (e.g., gain on the sale of long-term assets, gain on lawsuits)

B. Expenses and Losses 1. Expenses involved in primary activities

2. Expenses from secondary activities 3. Losses (e.g., loss on the sale of long-term assets, loss on lawsuits)

If the net amount of revenues and gains minus expenses and losses is positive, the bottom line of the profit and loss statement is labeled as net income. If the net

amount (or bottom line) is negative, there is a net loss. Note: We provide business forms for preparing income statements plus a visual

tutorial and exam questions pertaining to the income statement for members of Accounting Coach PRO.

A. Revenues and Gains

1. Revenues from primary activities are often referred to as operating revenues. The primary activities of a retailer are purchasing merchandise and selling the

merchandise. The primary activities of a manufacturer are producing the products and selling them. For retailers, manufacturers, wholesalers, and distributors the revenues resulting from their primary activities are referred to as sales revenues or

sales. The primary activities of a company that provides services involve acquiring expertise and selling that expertise to clients. For companies providing services,

the revenues from their primary services are referred to as service revenues or fees earned. (Some people use the word income interchangeably with revenues.)

It's critical that you don't confuse revenues with receipts. Under the accrual basis of accounting, service revenues and sales revenues are shown at the top of the income

statement in the period they are earned or delivered, not in the period when the cash is collected. Put simply, revenues occur when money is earned, receipts occur

when cash is received. For example, if a retailer gives customers 30 days to pay, revenues occur (and are

reported) when the merchandise is sold to the buyer, not when the cash is received 30 days later. If merchandise is sold in December, the sale is reported on the

December income statement. When the retailer receives the check in January for the December sale, the retailer has a January receipt—not January revenues.

Similarly, if a consulting company asks clients to pay within 30 days of receiving their service, revenues occur (and are reported) when the service is performed

(earned), not 30 days later when the consulting company receives the cash from the client.

If an attorney requires a client to prepay $1,000 before beginning to research the client's case, the attorney has a receipt, but does not have revenues until some of the research is done.

If a company sells an item to a buyer who immediately pays for it with cash, the company has both a receipt and revenues for that day—it has a cash receipt

because it received cash; it has sales revenues because it sold merchandise. By knowing the difference between receipts and revenues, we make certain that

revenues from a transaction are reported only once—when the primary activities have been completed (and not necessarily when the cash is collected).

Let's reinforce the distinction between revenues and receipts with a few more examples. (Keep in mind that all of the examples below assume the accrual basis

of accounting.)

A company borrows $10,000 from its bank by signing a promissory note due

in 90 days. The company will have a receipt of $10,000 at the time of the loan, but it does not have revenues because it did not earn the money from performing a service or from a sale of merchandise.

If a company provided a $1,000 service on January 31 and gave the customer until March 10 to pay for the service, the company's January

income statement will show revenues of $1,000. When the money is actually received in March, the March income statement will not show revenues for

this transaction. (In March the company will report a receipt of cash and a reduction/collection of an accounts receivable.)

A company performs a $400 service on December 31 and receives the $400 on the very same day (December 31). This company will report $400 in

revenues on December 31—not because the company had a cash receipt on December 31, but because the service was performed (earned) on that day.

On December 10, a new client asks your consulting company to provide a $2,500 service in January. You are uncertain as to whether or not this client

is credit worthy, so to be on the safe side you ask for an immediate partial payment of $1,000 before you agree to schedule the work for January.

Although your consulting company has a receipt of $1,000 in December, it does not have revenues in December. (In December your company will

record a liability of $1,000.) Your consulting company will report the $1,000 of revenues when it performs $1,000 of services in January.

2. Revenues from secondary activities are often referred to as nonoperating revenues. These are the amounts a business earns outside of purchasing and selling

goods and services. For example, when a retail business earns interest on some of its idle cash, or earns rent from some vacant space, these revenues result from an

activity outside of buying and selling merchandise. As a result the revenues are reported on the income statement separate from its primary activity of sales or service revenues.

As is true with operating revenues, nonoperating revenues are reported on the profit and loss statement during the period when they are earned, not when the cash

is collected.

3. Gains such as the gain on the sale of long-term assets, or lawsuits result from a

transaction that is outside of the primary activities of most businesses. A gain is reported on the income statement as the net of two amounts: the proceeds received

from the sale of a long-term asset minus the amount listed for that item on the company's books (book value). A gain occurs when the proceeds are more than the

book value. Consider this example: Assume that a clothing retailer decides to dispose of the

company's car and sells it for $6,000. The $6,000 received for the car (the proceeds from the disposal of the car) will not be included with sales revenues since the account Sales is used only for the sale of merchandise. Since this retailer

is not in the business of buying and selling cars, the sale of the car is outside of the retailer's primary activities. Over the years, the cost of the car was being

depreciated on the company's accounting records and as a result, the money received for the car ($6,000) was greater than the net amount shown for the car on

the accounting records ($3,500). This means that the company must report a gain equal to the amount of the difference—in this case, the gain is reported as

$2,500. This gain should not be reported as sales revenues, nor should it be shown as part of the merchandiser's primary activities. Instead, the gain will appear in a

section on the income statement labeled as "non operating gains" or "other income". The gain is reported in the period when the disposal occurred.

B. Expenses and Losses

1. Expenses involved in primary activities are expenses that are incurred in order to earn normal operating revenues. Under the accrual basis of accounting sales

commissions expense should appear on the income statement in the same period that the related sales are reported, regardless of when the commission is actually

paid. In the same way, the cost of goods sold is matched with the related sales on the income statement, regardless of when the supplier of the merchandise is paid.

Costs used up (or expiring) in the accounting period shown in the heading of the income statement are also considered to be expenses of that period. For example,

the utilities used in a retail store in December should appear on the December income statement, even if the utility's meters are not read until January 1 and the

bill is paid on February 1.

The above examples reflect the matching principle and show that under the accrual

basis of accounting, expenses on the income statement are likely to be reported at different times than the cash expenditures/disbursements. It is common for expenses to occur before the company pays for them (e.g., wages

earned by employees, employee bonuses and vacations, utilities, and sales commissions). However, some expenses occur after the company has paid for

them. For example, let's say a company buys a building on December 31, 2012 for $300,000 (excluding the cost of land). The building is assumed to have a useful life

of 30 years. The company paid cash for the building on December 31, 2012 but it will record depreciation expense of $10,000 in each of the years 2013 through

2042. Cash payments do not always mean that an expense has occurred. For example, a

company might pay $20,000 to the bank to reduce its bank loan. This payment will reduce the company's cash and its liability to the bank, but it is not an expense.

Some expenses are matched against sales on the income statement because there is a cause and effect linkage—the sale of the merchandise caused the cost of goods sold and the sales commission expense. Other expenses are not directly linked to

sales and as a result they are matched to the accounting period when they are consumed or used—examples include utilities expense, office salaries expense, and

depreciation expense. Some expenses such as advertising expense and research and development expense can neither be linked with sales nor a specific accounting

period and as a result, they are reported as expenses as soon as they occur.

The income statements or profit and loss statements of merchandisers and manufacturers will use a separate line for the cost of goods sold. The other

expenses involved in their primary activities will either be grouped together as operating expenses or subdivided into the categories "selling" and "administrative."

2. Expenses from secondary activities are referred to as nonoperating expenses. For example, interest expense is a nonoperating expense because it involves the

finance function of the business, rather than the primary activities of buying/producing and selling.

3. Losses such as the loss from the sale of long-term assets, or the loss on lawsuits result from a transaction that is outside of a business's primary activities. A loss is

reported as the net of two amounts: the amount listed for the item on the company's books (book value) minus the proceeds received from the sale. A loss occurs when

the proceeds are less than the book value. Let's assume that a clothing retailer decides to dispose of the company's car. The

proceeds from the disposal are $2,800. This is less than the $3,500 amount shown in the company's accounting records. Since this retailer is not in the business of buying and selling cars (the sale of the car is outside of the operating activities of

buying and selling clothing), the money received for the car will not be included in sales revenues, and the loss experienced on the sale of the car ($700) will not be

included in operating expenses. Instead, the $700 loss will appear in a section on the income statement labeled "nonoperating gains or losses" or "other income or

losses". The loss is reported in the time period when the disposal occurs.

Single-Step Income Statement

A single-step income statement is one of two commonly used formats for the

income statement or profit and loss statement. The single-step format uses only one subtraction to arrive at net income

NET INCOME = (REVENUE + GAINS) – (EXPENSES + LOSSES) An extremely condensed income statement in the single-step format would look

like this:

The heading of the income statement conveys critical information. The name of the company appears first, followed by the title "Income Statement." The third line

tells the reader the time interval reported on the profit and loss statement. Since income statements can be prepared for any period of time, you must inform the

reader of the precise period of time being covered. (For example, an income statement may cover any one of the following time periods: Year Ended May 31,

Five Months Ended May 31, Quarter Ended May 31, Month Ended May 31, or Five Weeks Ended May 31.)

A sample income statement in the single-step format would look like this:

Multiple-Step Income Statement

An alternative to the single-step income statement is the multiple-step income statement, because it uses multiple subtractions in computing the net income

shown on the bottom line. The multiple-step profit and loss statement segregates the operating revenues and

operating expenses from the non operating revenues, non operating expenses, gains, and losses. The multiple-step income statement also shows the gross

profit (net sales minus the cost of goods sold). Here is a sample income statement in the multiple-step format:

Using the above multiple-step income statement as an example, we see that there are three steps needed to arrive at the bottom line Net Income:

Step 1.

Cost of goods sold is subtracted from net sales to arrive at the gross profit.

Step 2. Operating expenses are subtracted from gross profit to arrive at operating income.

Step 3.

The net amount of nonoperating revenues, gains, nonoperating expenses and losses is combined with the operating income to arrive

at the net income or net loss.

There are three benefits to using a multiple-step income statement instead of a

single-step income statement:

1. The multiple-step income statement clearly states the gross profit amount.

Many readers of financial statements monitor a company's gross margin (gross profit as a percentage of net sales). Readers may compare a

company's gross margin to its past gross margins and to the gross margins of the industry.

2. The multiple-step income statement presents the subtotal operating income, which indicates the profit earned from the company's primary activities of

buying and selling merchandise. 3. The bottom line of a multiple-step income statement reports the net amount

for all the items on the income statement. If the net amount is positive, it is labeled as net income. If the net amount is negative, it is labeled as net loss.

Reporting Unusual Items

Income statements (whether single-step or multiple-step) report nearly all revenues, expenses, gains, and losses.

Sometimes rare or extraordinary events will occur during the income statement's time interval along with the normally recurring events. It's helpful to the reader of

the statement if these unique items are segregated into a special section near the bottom of either the single-step or multiple-step income statement. These unique or

rare items are:

1. Discontinued Operations

2. Extraordinary Items

When recording these items near the bottom of an income statement, it's required that you present them in the same order as they appear above. However, it is rare

for a company to have either one of these items, and it is highly unlikely that a company will have both.

1. Discontinued operations pertains to the elimination of a significant part of a company's business, such as the sale of an entire division of the company.

(Eliminating a small portion of product line does not qualify as a discontinued operation.)

2. Extraordinary items includes things that are unusual in nature and infrequent in occurrence. A loss due to an earthquake in Wisconsin would certainly be

extraordinary. A loss due to a foreign country taking over a U.S. oil refinery in that country would be an extraordinary item.

If an item is unique and significant but it does not meet the criteria for being both "unusual and infrequent," the item must remain in the main section of the income

statement; it can however be shown as a separate line item. For example, if a company suffers a $40,000 loss due to a strike by its workers, the $40,000 cannot be shown as an extraordinary item since it is not unusual in nature for a strike to

occur. The $40,000 may be shown as a separate line item, but it must be positioned in the main portion of the income statement.

Two additional examples of situations that do not qualify as extraordinary items are (1) the loss from frost damage to a Florida citrus crop and (2) the write-down

of inventory from cost to a lower amount. Apparently the frost in Florida is not unusual in nature and not infrequent. Similarly, it's not unusual for items in

inventory to have a current value lower than its cost. Although these things maybe significant, unusual, and important, they do not belong in the section containing

extraordinary items. Below is an example of a single-step income statement containing an extraordinary

item. (If this were a corporation, income tax expenses would be part of the income statement and an extraordinary gain would be reduced by the income tax expense associated with the gain; an extraordinary loss would be reduced by the income tax

savings associated with the loss.) See net of tax.

Note that even in a single-step format shown above, the extraordinary item is separated out and added to the end of the income statement. The same would be

true for discontinued operations. Below is a multiple-step income statement containing discontinued operations and

an extraordinary item. (If this were a corporation, income tax expenses would be part of the income statement; the two unique items would be reduced by the

income tax effect associated with each item.)

Note that the two unique items are shown near the bottom of the income statement. This is where the items should appear on both single-step and multiple-step

statements.

Earnings Per Share of Common Stock

If the business is a corporation with common stock that is publicly traded, it is

required that the net income, discontinued operations, and extraordinary items be shown on the income statement on an after-tax, per-share basis.

Notes To Financial Statements

The notes (or footnotes) to the income statement and to the other financial statements are considered to be part of the financial statements. The notes inform

the readers about such things as significant accounting policies, commitments made by the company, and potential liabilities and potential losses. The notes

contain information that is critical to properly understanding and analyzing a company's financial statements.