The Income Statement

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. 

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. 

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. 

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. 

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. 

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. 

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 three financial reports that are essential to the operation of any organization are the balance sheet, the income statement, and the statement of cash flows (Table 15-1). Please note that several other types of financial... 

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. 

It also shows the net income for year 1. It is important to understand that the terms net income and earnings are used interchangeably in financial reports. You will note that the net income for year 1 is 300,000. The balance sheet (Table 15-2) shows retained earnings of 200,000. This is the portion of the net income that the owners have reinvested in the business. Where did the rest ( 100,000) of the net income go It was redistributed among owners as dividends (as depicted in Table 15-4). The connection between the net income value from the income statement and retained earnings from the balance sheet is an example of how these two reports are linked. In this particular example, the details of this linkage can be examined by the statement of retained earnings (Table 15-4). 

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. 

The revenues on the monthly income statement have to be revised once reimbursements have been received from third-party payers. The reason for making adjustments is that most payers make adjustments to each claim and charge the pharmacy administrative fees. Therefore, the actual amount paid to the pharmacy for prescriptions dispensed is almost always lower than the amount indicated on the Daily Plan Payment report. If the manager fails to revise the revenues, the income statement will show artificially inflated revenue. This can have a number of adverse consequences for a pharmacy including inaccurate financial reports and higher income taxes. In other words, if the revenues are recorded from online adjudications, the pharmacy... 

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. 

The only information in the income statement that will change if the pharmacy accepts the new Better Health contract is the prescription sales. Recall that the pharmacy dispensed 56,795 prescriptions last year and that 11,359 (20 percent) of those prescriptions were Better Health. To determine the decrease in prescription sales, multiply the number of Better Health prescriptions by the average decrease in reimbursement per prescription. The average decrease in reimbursement may be obtained from the average net profit comparison in Table 16-4 ( 66.53 - 61.26 = 5.27). The total decrease in prescription sales is 59,862 (11,359 x 5.27). Subtracting this amount from the current prescription sales gives the projected prescription sales of 3,915,788. The rest of the income statement can be constructed using the other information in the current income statement. 

The rest of the income statement can be constructed using the other information in the current income statement. 

Statements showing the financial condition of the business concern are prepared periodically from the ledger accounts. These statements are presented in the form of balance sheets and income statements. The balance sheet shows the financial condition of the business at a particular time, while the income statement is a record of the financial gain or loss of the organization over a given period of time. 

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. 

After compiling the estimated operational costs, update the income statement (Exhibit 11.5) to see if your initial profit projections are still on target. For our coffee shop example, total costs will likely be less than predicted on the reverse income statement, which increases the amount of projected profit. Of course, had the pro forma operation specs predicted higher costs than the initial estimate. Pikes Peak Coffee would need to either reduce costs or increase revenue projections. 

Make a list of any critical assumptions that, if left unchecked, could seriously impact your innovation financially. Many of these you have already created for the income statements and operations specs. Include the following ... 

The income statement or consolidated statement of operations is a summary of the incomes, expenditures, and taxes paid by the company over a fixed period of time. Results are usually presented for the past three calendar years. 

Depreciation (negative on the income statement but will be added back on the cash flow statement) ... 

The income statement gives a good insight into the overall profitability and margins of a business. It has to be read carefully though, as several items listed are noncash charges such as depreciation that do not affect the cash flow of the business. Corrections for these items are made in the cash flow statement. 

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