Income Statement

Objectives Describe the importance of income statements. Identify sources of revenue and expenses. Given a list of transactions, categorize revenues and expenses.

Terms Accounts payable-Unpaid bills or debt. Accrual accounting – Income and expenses that are anticipated. Inventory increase and decreases are also included. Accrued interest – Amount of interest that would be due if the note was paid off on the date the statement is prepared. Interest built up over a period of time.

Terms Net income – Revenue – expenses Owner Equity statement – Uses a combination of the balance sheet and the income statement to determine the businesses equity at the end of the financial period. Revenue – Income to the business from goods and services. Unused supplies – inventory.

Terms Cash Accounting – Methods of accounting where income is credited to the year they are paid. Expense – Cost involved with producing a product or service. Income – Payment received from goods or services, can be cash or non- cash

Importance of an Income Statement. Answers 2 questions Did the business end the year with a profit or loss? How much was the profit or loss?

5 Primary uses of an income statement Profitability Financial Efficiency Profit or loss Repayment capacity Loan application support

Cash vs. Accrual Accounting Cash accounting recognizes only cash income and expenses Cash revenue - cash expenses = net cash income Net cash income - depreciation = net income from operations Net income from operation  gain/loss on sale of capital assets = net income Accrual – Recognizes income and expenses not yet actually paid. Gross revenue - cash expenses - depreciation  non-cash expense adjustment = net income from operation Net income from operations  gain/loss on sale of capital assets = net income

Summary of revenue and expenses Revenue = cash receipts from product sales or dividends on interest income. Short or long term asset sales Inventory adjustments

Examples of revenue Cash Revenues Non-cash Revenues Cash sales Government payments Custom work receipts Non-cash Revenues Acct. Receivable Changes in inventory

Summary of Revenue & Expenses operating interest non-cash expense adjustment

Examples of expenses Cash operating Non-cash expenses seed fertilizer chemicals Non-cash expenses depreciation changes in unused supp., acct. pay., accrued int., accrued taxes

Net Income Net income = revenue - expenses Net income calculated annually Corresponds with income tax reporting dates