Powerpoint Lecture on Balance Sheet and Income Statement

INCOME STATEMENT
(1) A financial statement that measures a company's financial performance over a specific accounting period. Financial performance is assessed by giving a summary of how the business incurs its revenues and expenses through both operating and non-operating activities. It also shows the net profit or loss incurred over a specific accounting period, typically over a fiscal quarter or year. Also known as the "profit and loss statement" or "statement of revenue and expense". The income statement is the one of the three major financial statements. The other two are the balance sheet and the statement of cash flows. The income statement is divided into two parts: the operating and non-operating sections. The portion of the income statement that deals with operating items is interesting to investors and analysts alike because this section discloses information about revenues and expenses that are a direct result of the regular business operations. For example, if a business creates sports equipment, then the operating items section would talk about the revenues and expenses involved with the production of sports equipment. The non-operating items section discloses revenue and expense information about activities that are not tied directly to a company's regular operations. For example, if the sport equipment company sold a factory and some old plant equipment, then this information would be in the non-operating items section.
(2) Income statement, also called profit and loss statement (P&L), is a company's financial statement that indicates how the revenue (money received from the sale of products and services before expenses are taken out, also known as the "top line") is transformed into the net income (the result after all revenues and expenses have been accounted for, also known as the "bottom line"). The purpose of the income statement is to show managers and investors whether the company made or lost money during the period being reported. The important thing to remember about an income statement is that it represents a period of time. This contrasts the balance sheet, which represents a single moment in time. Charitable organizations that are required to publish financial statements do not produce an income statement. Instead, they produce a similar statement that reflects funding sources compared against program expenses, administrative costs, and other operating commitments. Income statements should help investors and creditors determine the past performance of the enterprise, predict future performance, and assess the capability of generating future cash flows. However, information of an income statement has several limitations:

• Items that might be relevant but cannot be reliably measured are not reported (e.g. brand recognition and loyalty).
  
• Some numbers depend on accounting methods used (e.g. using FIFO or LIFO accounting to measure inventory level).
  
• Some numbers depend on judgments and estimates (e.g. depreciation expense depends on estimated useful life and salvage value).
  

Items on income statement
Operating section

• Revenue - Cash inflows or other enhancements of assets of an entity during a period from delivering or producing goods, rendering services, or other activities that constitute the entity's ongoing major operations. Usually presented as sales minus sales discounts, returns, and allowances.
  
• Expenses - Cash outflows or other using-up of assets or incurrence of liabilities during a period from delivering or producing goods, rendering services, or carrying out other activities that constitute the entity's ongoing major operations.
  
  
  
  • General and administrative expenses (G & A) - represent expenses to manage the business (officer salaries, legal and professional fees, utilities, insurance, depreciation of office building and equipment, office rents, office supplies)
    
  • Selling expenses - represent expenses needed to sell products (e.g., sales salaries, commissions and travel expenses, advertising, freight, shipping, depreciation of sales store buildings and equipment)
    
  • R & D expenses - represent expenses included in research and development
    
  • Depreciation - is the charge for a specific period (i.e. year, accounting period) with respect to fixed assets that have been capitalised on the balance sheet.
    
  Non-operatingsection</li>
  
• Other expenses or losses - expenses or losses not related to primary business operations.
  

Because of its importance, earnings per share (EPS) are required to be disclosed on the face of the income statement. A company which reports any of the irregular items must also report EPS for these items either in the statement or in the notes.

= Net Income MINUS Preferred Stock dividends DIVIDED BY Weighted averageof common stock shares outstanding