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Introduction to income statementThe income statement is one of the major financial statements used by accountants andbusiness owners. (The other major financial statements are the balance sheet,statement of cash flows, and the statement of stockholders' equity.) The incomestatement is sometimes referred to as the profit and loss statement (P&L), statement ofoperations, or statement of income. We will use income statement and profit and lossstatement throughout this explanation.The income statement is important because it shows the profitability of a companyduring the time interval specified in its heading. The period of time that the statementcovers is chosen by the business and will varyFor example, the heading may state:

"The Fiscal Year Ended September 30, 2010" (The period of October 1, 2009 throughSeptember 30, 2010.)

Expenses and lossesPeople pay attention to the profitability of a company for many reasons. For example, ifa company was not able to operate profitablythe bottom line of the income statementindicates a net lossa banker/lender/creditor may be hesitant to extend additionalcredit to the company. On the other hand, a company that has operated profitablythebottom line of the income statement indicates a net incomedemonstrated its ability touse borrowed and invested funds in a successful manner. A company's ability tooperate profitably is important to current lenders and investors, potential lenders andinvestors, company management, competitors, government agencies, labor unions, andothers.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 thefollowing elements in their income statements:

A. Revenues and Gains1. Revenues from primary activities2. Revenues or income from secondary activities3. Gains (e.g., gain on the sale of long-term assets, gain on lawsuits)

B. Expenses and Losses1. Expenses involved in primary activities2. Expenses from secondary activities3. 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, thebottom 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.

B. Eand Losses

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An extremely condensed income statement in the single-step format would look likethis:

The heading of the income statement conveys critical information. The name of thecompany appears first, followed by the title "Income Statement." The third line tells thereader the time interval reported on the profit and loss statement. Since incomestatements can be prepared for any period of time, you must inform the reader of theprecise period of time being covered. (For example, an income statement may coverany one of the following time periods: "Year Ended May 31,""Five Months Ended May31,""Quarter Ended May 31,""Month Ended May 31, or"Five Weeks Ended May 31".)

2. Multistep income statementAn alternative to the single-step income statement is the multiple-step income

statement, because it uses multiple subtractions in computing the net income shown onthe bottom line.

The multiple-step profit and loss statement segregates the operating revenues andoperating expenses from the nonoperating revenues, nonoperating expenses, gains,and losses. The multiple-step income statement also shows the gross profit (net salesminus the cost of goods sold).

Here is a sample income statement in the multiple-step format:

Sample Products Co.

Income StatementFor the Five Months Ended May 31,

2010

Revenues & Gains $108,000Expenses & Losses 90,000Net Income $ 18,000

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Sales$100,000

Cost of Goods Sold 75,000Gross Profit 25,000Operating ExpensesSelling Expenses

Advertising Expense 2,000Commissions Expense 5,000 7000Administrative ExpensesOffice Supplies Expense 3,500Office Equipment Expense 2,500 6000Total Operating Expenses 13,000

Operating Income 12,000Non-Operating or OtherInterest Revenues 5,000

Gain on Sale of Investments 3,000Interest Expense (500)Loss from Lawsuit (1,500)

Total Non-Operating 6,000Net Income $ 18,000