Income statement general

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. 

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. 

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. 

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. 

The same procedure is followed for each succeeding month, with each transaction being entered in the general journal then posted to the appropriate ledger account. At the end of February, an income statement and balance sheet may be prepared. In this manner, information for an annual report is assembled. 

From the transactions in the general journal, prepare a ledger, a balance sheet, and an income statement for the month of February for Delchem Corporation. See (Table 3.16). 

In reading an annual report, one will find numerous notes referring to the balance sheet and/or the income statement. These notes indicate any litigation pending and generally how some numbers in the report were obtained. The notes often alert the reader to potential financial problems. 

Actual operating expense reports, given in Table 16.10, form the basis for information needed for the income statement. Table 16.8, such as the cost of goods sold, depreciation, amortization and depletion, and general overhead expense. This information would be used in the quantitative measures of financial attractiveness. 

The profit and loss (P L) statement is also referred to as income statement. In general, it provides information on profit gained by the company (Guilding, 2010). The P L statement is a skeletal statement consisting of three factors net sales, which is sales volume cost of merchandise sold, which is also called cost of goods sold and operating expenses. 

Table 10.4 follows the same general format as the example of personal income statement but applies to a hypothetical construction company. The hypothetical business for which the income statement was developed is for the same business in the calendar year for which Table 10.2, the balance sheet, was developed. One indication of the relationship between the balance sheet and the income statement is retained earnings of 252,755.21 in Table 10.2 and the identical retained earnings balance at the end of the year in Table 10.4. However, there are a few obvious connections between the construction company s balance sheet (Table 10.2) and its income statement (Table 10.4).

There may be some exceptions to the general statement that both a balance sheet and income statement are desired. For example, a modest sole proprietorship consulting business will need an income statement. However, it may not require a balance sheet because it operates on a cash basis with no significant liabilities and has little property or other assets. 

The status of the Trust Fund will be included in the quarterly income-and-expenditure statements submitted by the Director-General to the Council. 

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