Income Statement Accounting Assignment Help

The income statement is one of the three primary financial statements used to assess a company’s performance and financial position (the two others being the balance sheet and the cash flow statement). The income statement summarizes the revenues and expenses generated by the company over the entire reporting period. It indicates how the revenues are transformed into the net income. It displays the revenues recognized for a specific period and the cost and expenses charged against these revenues, including write-offs (e.g., bad debts, depreciation and amortization of various assets) and taxes. It is a simple and straightforward report on a business' cash-generating ability. It's a scorecard on the financial performance of your business that reflects when sales are made and expenses are incurred. It draws information from the various financial models such as revenue, expenses, capital (in the form of depreciation) and cost of goods. In contrast to a balance sheet, an income statement depicts what happened over a month, quarter, or year. It is based on a fundamental accounting equation (Income = Revenue - Expenses) and shows the rate at which the owner’s equity is changing for better or worse. Along with balance sheet and cash flow statement it forms the basic set of financial information required to manage an organization. The income statement is also known as a profit and loss (P&L) statement, statement of earnings, statement of operations or statement of income. The purpose of the income statement is to show managers and investors whether the company made or lost money during the period being reported.

All companies need to generate revenue to stay in business. Revenues are used to pay expenses, interest payments on debt and taxes owed to the government. After the costs of doing business are paid, the amount left over is called net income. Net income is theoretically available to shareholders, though instead of paying out dividends, the firm's management often chooses to retain earnings for future investment in the business.

Usefulness & limitations of Income Statement

Income statements help investors and creditors determine:

  1. past financial performance of the enterprise,
  2. predict future performance and
  3. Assess the capability of generating future cash flows through report of the income and expenses.

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However, information of an income statement has several limitations:

  1. Items that might be relevant but cannot be reliably measured are not reported (e.g. brand recognition and loyalty).
  2. Some numbers depend on accounting methods used (e.g. using FIFO or LIFO accounting to measure inventory level).
  3. Some numbers depend on judgments and estimates (e.g. depreciation & amortization expense).
Profit or Loss Account Format
(Value in $)
Less: Direct Expense/COGSXXX300
Gross Profit (Sales-COGS)XXXX700
Less: Operating ExpenseXXX500
Operating ProfitXXXX200
Less: Interest ExpenseXXX50
Earnings before Tax(EBT)XXXX150
Less: TaxesXXX40
Net IncomeXXXX110
No. of outstanding shares100
Earnings per share (EPS)$1.10