Income statement expenses

The earlier observation about the variation in accuracy of line items in the balance sheet also applies to the income statement. For example, while items such as salary and interest and dividends earned can be listed to the nearest penny in a retrospective income statement, expense items such as entertainment/travel and clothing would be estimates unless unusually meticulous records were kept. Variation of accuracy within the income statement does not in any significant way detract from its usefulness as an analysis and planning tool. 

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. 

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. 

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. 

The ability to understand and apply the concepts of cost analysis, profitability analysis, budgets, income-and-expense statements, and balance sheets are key skills that may be valuable. This section treats two major components of economic... 

The third statement shown in Figure B. 10 is for income and expense that leads to net after-tax profits (earnings), a quantity that transfers to the balance sheet periodically in the category called equity. 

The reconciliation between the cash flow statement and the income and expense statement is as follows. Start with the 40,000 from the last line in the cash flow statement, subtract 20,000 for the depreciation expense, and add back the 30,000 mortgage loan principal payment (not an allowed expense). The result is the net after-tax earnings. Figure B.ll is a set of statements from a small oil company. The statement of operations lists revenue and expenses, whereas the balance sheet lists various assets, liabilities, and stockholders equity ( net worth ). So-called capital items such as buildings, equipment, oil and gas property, and various intangibles are assets. Operating costs are deductions from revenues for operations not including expenditures for capital items. 

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 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... 

The income statement is a dynamic document that provides information about money coming into an organization (income) and money necessary to obtain that income expensed). The difference between income and expenses is commonly referred to as net income, net profit, or earnings. The income statement tells the reader what happens to an organization over a period of time. While organizations generally create income statements that span their fiscal year, they often create income statements that describe revenues, expenses, and net income over shorter periods of time, such as quarters, months, weeks, or even over a single day. 

Table 15-3 shows WHP s income statement for year 1. The income statement shows all the operating activities that resulted in either revenues or expenses. 

The revenues and expenses from the Daily Plan Payment report are compiled each month and entered into the income statement report (typically by the organization s accountant or bookkeeper, not by the pharmacists themselves). WHP begins its fiscal year on November 1. In addition to the yearly income statement and balance sheet, WHP s accountant prepares a monthly income statement and balance sheet to provide managers with a more precise picture of the financial status of the pharmacy. Before we examine these reports, we have to consider an important point about the preparation of the monthly income statement. 

Labor expenses will need to be allocated between the prescription department and the rest of the pharmacy. These expenses typically are allocated based on the percent of time spent in the prescription department. Marcie Hawkins, the pharmacy manager at Good Service Pharmacy, estimates that she spends 75 percent of her time in the prescription department. Assume that the employee pharmacist and the pharmacy technicians spend 95 percent of their time in the prescription department, so 95 percent of their wages is allocated to the cost of dispensing. The other workers spend about 50 percent of their time in the prescription department. Using these percentages and the wage information contained in the notes under the Income Statement, the total amount of labor costs allocated to the prescription department is 423,165. 

Some expenses are directly related to prescription drug dispensing and should be allocated 100 percent to the prescription department. For Good Service Pharmacy, the direct expenses that are listed on the Income Statement are prescription vials and the computer. The total of these direct expenses is 17,250. Note Other direct expenses that may appear in a pharmacy Income Statement include delivery expenses, professional liability insurance, continuing education expenses, transaction fees, and professional license fees. 

A balance sheet applies only at one specific time, and any additional transactions cause it to become obsolete. Most of the changes that occur in the balance sheet are due to revenue received from the sale of goods or services and costs incurred in the production and sale of the goods or services. Income-sheet accounts of all income and expense items, such as sales, purchases, depreciation, wages, salaries, taxes, and insurance, are maintained, and these accounts are summarized periodically in income statements. 

The most popular statement is the income statement, also referred to as the profit and loss statement. This statement reflects the results of all business transactions over a period of time and is a summary of all the firm s earned revenue, i.e., income from sales and services less all expenses incurred, i.e., costs associated with the earning process. The income statement usually covers a specific period of time selected by the firm, generally called a fiscal period. The fiscal period basically describes a business year, e.g., beginning on May 1, 2002, and ending on April 30, 2003. Many firms use a calendar year extending from January 1 to December 31 of the same year as their fiscal year. 

Income statements are generally completed on a monthly basis, especially in a pharmacy, because it is essential to keep track of the company s profitability in a timely manner in order to institute corrective actions when necessary. When total revenue exceeds total expenses over the period selected, the remaining positive amount reflects a net income (profit).When the opposite occurs and total expenses exceed total revenue, the result is a net loss. Table 9.3 presents a brief sample of an income statement. 

Periodically, perhaps on a monthly basis but certainly yearly, the ledger sheets are closed and balanced. The ledger sheets are used as intermediate documents between journal records and balance sheets, income statements, and retained earnings statements, as well as information for various government reports. For example, a consolidated income statement can be prepared from the ledger revenue and expense accounts. From the asset and liability accounts, a company s balance sheet is prepared. Table 3.2 is the ledger obtained from the general journal. Table 3.1. 

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