Income Statement

Last meeting, we discussed about preparing an income statement for merchandising business. Sir Randy presented to us what an income statement is and the different ways to prepare it.

As defined by Investopedia (n.d.), income statement is a financial statement that shows the financial performance of a business over a specific accounting period. The financial performance of a business is measured through the incurred revenues and expenses of the business from operating and non-operating activities. Income statement may also be referred to as the profit and loss statement or statement of revenue and expense.

Income statement reflects the net profit or loss of the business over a specific accounting period. Some information included in the income statement are revenue (net/total sales), cost of goods sold (which was derived from subtracting the merchandise inventory ending from the sum of merchandise inventory and net/total purchases), gross profit on sales (from subtracting revenue and the total cost of goods sold), net profit (from the difference between gross profit on sales and operating expenses), and net income or loss (from the sum/difference of net profit and other income, if applicable). This information will show the income or loss incurred by the business over a given accounting period.

Income statement can be prepared in three different ways – traditional, single step and multiple step. The traditional shows the basic categories. The single step shows the information under each basic categories. We will use the multiple step where it shows the detailed computation of all the information given or stated in the income statement. An example of a multiple step income statement is:

This kind of format will be able to show the complete information on how the business incurred revenue and expenses through operating and non-operating activities. Through this, the business owner can monitor the changes that happened in his/her business by comparing them to the previous income statement. He/she can also monitor what happened in the business over a period of time.

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There are also other sites that tackles about income statement.

This site contains the overview of the income statement. The information in here will be very helpful especially to those who have a little background about income statement. (URL source: http://www.accountingtools.com/income-statement-overview)

This website provides a detailed explanation about income statement and how it is prepared. This site will be very helpful especially to bookkeeping students since this will serve as our guide in preparing income statement. (URL source: http://www.accountingcoach.com/income-statement/explanation)

This video shows the details of what comprises an income statement. It also explains about why an income statement is prepared. (URL source: http://study.com/academy/lesson/what-is-an-income-statement-purpose-components-format.html)

This website also provides the necessary information contained in an income statement. It also has a video that presents a brief introduction about income statement. (URL source: http://www.investopedia.com/terms/i/incomestatement.asp)

In summary, an income statement is one of the financial statements prepared by business owners for them to see the net income or loss of their businesses over an accounting period which can be monthly, quarterly, semi-annually or annually. This document shows the profitability of a business over a specific accounting period (Peavler, 2016). There are three ways to prepare an income statement: traditional, single step and multiple step. These three ways only differs on how they present the data. The multiple step shows the most detailed on how the business incurred income or loss over a period of time.

From this lesson, I learned a lot of things about preparing an income statement. I also noticed that this is way different from preparing an income statement for a service business. There are a lot of information added in the document just like the cost of goods sold, goods available for sale, etc. At first, this document is really confusing since we follow the multiple step but with the help of my notes and classmates, I don’t have any problem now in preparing it. Also, this document really reflects the gain or loss of the business. I noticed it when Sir Randy let us analyze one of our 8-column worksheet, and the information reflected on the income statement helped me in analyzing the document. Hence, I think that it is really important that we know and understand what’s in the income statement for us to see the gain or loss of the business in different activities and for us to monitor what’s going on in the business.

References:

Investopedia. (n.d.). Income Statement. Retrieved 3 March 2017 from http://www.investopedia.com/terms/i/incomestatement.asp

Peavler, R. (13 June 2016). How to Prepare an Income Statement. Retrieved 3 March 2017 from https://www.thebalance.com/common-size-income- statement-analysis-an-example-393579