1. Chapter 9: Accounting Preparing Financial Statements – Income Statement 1

2. The Income Statement The income statement is used to calculate and report the profit or loss from business operations. The income statement reports the profit or loss for a period of time – week, month, quarter (3 months), or year. 2

3. Preparing Financial Statements – Income Statement Review: A business is an organization that produces or sells goods or services to satisfy needs, wants and demands of consumers for the purpose of making a profit. Revenues & Expenses: Business profits generate from revenues & expenses: Revenues – the money (or promise of money), received from the sale of goods or services. Expenses – the money spent to create revenue (ex. salaries, advertising) 3

4. Preparing Financial Statements – Income Statement Examples: 1. Calculate the profit/loss: A business sells a cellphone for $150. It cost the business $85 to produce the cellphone. Revenue = $150, Expense = $85 Profit = $100 - $85 = $65 2. Calculate the profit/loss: A business sells a cellphone for $75. It cost the business $85 to produce the cellphone. Revenue = $75, Expense = $85 Loss = $75- $85 = $10 4 When a loss is reported on an income statement it is put in parentheses: ($10) NOT: -$10

5. Preparing Financial Statements – Income Statement Steps in preparing the Income Statement: Step 1: Fill in the Statement Headings: company name/financial statement name/date of completion Mark’s Repair Shop Income Statement For the month ending October 30, 2015 5

6. Preparing Financial Statements – Income Statement Steps in preparing the Income Statement: Step 2: Organize the Revenue Section: all sources of revenue should be listed. Revenue Repairs Revenue$9 900 Total Revenue$9 990 6

7. Preparing Financial Statements – Income Statement Steps in preparing the Income Statement: Step 3: Organize the Expense Section: listed in order of highest to lowest. Expenses Salaries$2 600 Rent 2 000 Advertising 850 Utilities 235 Insurance 150 Delivery Expense 770 Total Expenses$6 790 7

8. Preparing Financial Statements – Income Statement Steps in preparing the Income Statement: Step 4: Calculate Net Income (Profit) or Net Loss: Total Revenue – Total Expenses = Net Income (Loss) $9900 – $6 690 = $3 110 8

9. Preparing Financial Statements – Income Statement Steps in preparing the Income Statement: Step 4: PUT IT ALL TOGETHER!! 9

10. Preparing Financial Statements – Income Statement Step 5: Mark’s Repair Shop Income Statement For the month ending October 30th, 2015 Revenue Repairs Revenue$9 900 Total Revenue$9 900 Expenses Salaries$2 600 Rent 2 000 Advertising 850 Utilities 235 Insurance 150 Delivery Expense 770 Total Expenses$6 690 Net Income$3 110 10 Step 1 Statement Headings Step 2 List Revenues Step 3 List Expenses Step 4 Calculate Net Income

11. Preparing Financial Statements – Income Statement The Matching Principle: The expenses reported on the income statement should only be shown if they were incurred to generate the revenue for that period. 11

12. Preparing Financial Statements – Income Statement The Matching Principle: Mark’s Repair Shop Example: Monthly Revenue:Monthly Expenses May $5 000May: Advertising $400, Salaries $1200 June $6 000June: Advertising $900, Salaries $2 000 July $1 000July: Advertising $1200, Salaries $500 Calculate Net Profit /(Net Loss) for each period: For the month ending May 31 st, 2015: Net Profit = $5000 - $400 - $1200 = $3400 For the month ending June 30th, 2015: Net Profit = $6000 - $900 - $2000 = $3100 For the month ending July 31 st, 2015: Net Loss = $1000 - $1200 - $500 = ($700) 12