Income statements

Closing the Books At the end of the accounting period, the individual accounts are closed by balancing each in accordance with Eq. (9-126). The balances are transferred either to the balance sheet in the case of capital expenditure or to the income statement in the case of revenue expenditure. An alternative name for the balance sheet is the position statement the income statement is also caUed the trading and profit-and-loss account. 

An income statement such as the one shown in Table 9-16 is used to obtain the profit or loss for a given period. The debit and credit balances of all the accounts that do not represent expenditure or income for a given accounting period are entered as assets and liabilities in a balance sheet such as that shown in Table 9-17. 

There is no rigid format for either the income statement or the balance sheet. Tables 9-16 and 9-17 show common layouts for the income statement and balance sheet respectively, but these are not the only forms. For example, vertical balance sheets, with the assets listed above the liabilities and equity, are also popular. 

Concept 1. Money measurement means that only those facts that can be represented in monetary terms are recorded. The balance sheet and income statement for a company give no indication as to what might happen in the future. The company may be about to be successfully sued for a large sum of money, or a competitor may be launching a new product that will seriously reduce future sales of the company s products. 

Accountants regard assets as resources that have not yet been used up. Assets are normally shown on the balance sheet at cost minus accumulated depreciation. In this sense, the depreciation charge for an accounting period is the means of converting a part of an asset into a current expenditure that is then listed as an expense in the income statement. 

Let us consider plant eqmpment costing I million and purchased on Jan. I, 1988. T le 9-18 ows the provision for the depreciation account for 1988, 1989, and 1990 for straight-line depreciation, assuming a service hfe of 10 years and zero scrap value. The credit entries of 100,000 for the depreciation in each year are balanced by the depreciation charge of 100,000 debited to the income statement (or trading and profit-and-loss account) in each year. Table 9-19 shows the corre-... 

Income Statement Income statements range from the veiy simple presentation shown in Table 9-16 to the more informative and more complex presentation shown in Table 9-20. The income statement shows the revenue and the corresponding expenses that were incurred to earn that revenue over a period of time. It is the most obvious measure of the efficiency of a business. Although pubhshed income statements are normally for I-year periods, many companies use monthly income statements for internal purposes. 

Income statements are veiy useful tools to assist management in controlling a business and planning for the future. Since management needs to follow the trends of the normal expenses, extraordinaiy expenses such as those incurred as a result of a major fire or flood should be shown separately. 

One of the most important items in an income statement is depreciation expense. Although depreciation should not be thought of as a means to build up a fund to replace plant, it nevertheless does enable money to be retained in the business by reducing the profit available for distribution to stockholders. It is of course a duty of both accountants and management to see that sufficient money is retained in the business to replace assets and to invest such money in other processes or outside investment. 

Types of Accountancy The traditional work of accountants has been to prepare balance sheets and income statements. Nowadays, accountants are becoming increasingly concerned with foi ward planning. Modern accountancy can roughly be divided into two branches, financial accountancy and management or cost accountancy. 

Financial accountancy is concerned with stewardship. This involves the preparation of balance sheets and income statements that represent the interest of stockholders and are consistent with existing legal requirements. Taxation is an important element of financial accounting. 

TABLE 9-20 Income Statement for a Mature Year for a New Chemical Product, Produced at 10 Million Ib/Year... 

Management and Cost Aeeounting In any given time period, cost may be divided into expired and unexpired cost. An expired cost is an expense an unexpired cost is an asset. This division is the basis for income statements and balance sheets. 

An income statement or profit-and-loss account gives the net annual profit A vp before tax. In order to assess the annual cash income Ac, as a source of funds from the value of the net annual profit A vp given in the income statement, it is necessary to add back all noncash expenses such as the balance-sheet annual depreciation charge Abd-This practice sometimes erroneously suggests that depreciation is a source of funds, whereas cash income is the only source of funds. 

After the balance sheet and the income statement or profit-and-loss account, the funds statement is generally regarded as the most important financial document. However, many financial managers regard a statement showing changes in cash as being of equal importance. 

As with balance sheets and income statements, there is no rigid format for funds statements. These vaiy in the amount of detail given and... 

Budgeted income statements are identical in form to ac tual income statements. However, the budgeted numbers are objectives rather than achievements. Budgetary models based on mathematical equations are increasingly being used. These may be used to determine rapidly the effect of changes in variables. Variance analysis is discussed in the treatment of manufacturing-cost estimation. 

The Duns Financial Records Plus (DFR) database provides a balance sheet, income statement, and fourteen of the more widely used business ratios for measuring solvency, efficiency, and profitability. DFR also provides industiy norms and percentages that can be used to compare a toller s financial position to that of their... 

N.N. (2006a) Income statement. Wikipedia, The Free Encyclopedia. URL http //en.wikipedia.org/wiki/Profit and loss statement, Date 24.07.2006 N.N. (2006b) Economic Value Added. Wikipedia, The Free Encyclopedia. URL http //de.wikipedia.org/wiki/Economic Value Added, Date 27.07.2006 N.N. (2006c) Marksituation. Wikipedia, Die freie Enzyklopadie. URL ... 

A financial report contains two important documents—the balance sheet and the income statement. Two other documents that appear in the financial report are the accumulated retained earnings and the changes in working capital. All these documents are discussed in the following sections using a fictitious company. 

Balance Sheet The balance sheet represents an accounting view of the financial status of a company on a particular date. Table 9-3 is an example of a balance sheet for a company. The date frequently used by corporations is December 31 of any given year, although some companies are now using June 30 or September 30 as the closing date. It is as if the company s operation were frozen in time on that date. The term consolidated means that all the balance sheet and income statement data include information from the parent as well as subsidiary operations. The balance sheet consists of two parts assets are the items that the company owns, and liabilities and stockholders equity are what the... 

The sum of the total product expense and the general overhead expense is the total operating expense. This item ultimately becomes part of the operating expense on the income statement. 

Catalysts and chemicals Licenses, patents, etc. Total capital investment Income statement Income Expenses... 

Income statement The statement of earnings of a firm as approximated by accounting practices, usually covering a 1-year period. 

Taxes In a manufacturing cost statement, usually property taxes. In an income statement, usually federal and state income taxes. 

Income Statement An income statement shows the revenue and the corresponding expenses for the year and serves as a guide for how the company may do in the future. Often income statements may show how the company performed for the last two or three years. Table 9-4 is an example of a consolidated income statement. 

Net sales are the primary source of revenue from goods and services. This figure includes the amount reported after returned goods, discounts, and allowances for price reductions are taken into account. Cost of sales represents all the expenses to convert raw materials to finished products. The major components of these expenses are direct material, direct labor, and overhead. If the cost of sdes is subtracted from net sales, the result is the gross margin. One of the most important items on the income statement is depreciation and amortization. Depreciation is an allowance the federal government permits for the... 

RELATIONSHIP BETWEEN BALANCE SHEETS AND INCOME STATEMENTS... 

Cash flow and income statements identify the flow of funds through a business... 

---