Sections of the Income Statement
The income statement give a summary of how much revenue an organization made during a reporting period and the much used to produce that revenue.The income statement helps in determining the past financial performance of the business, have a prediction of the future performance, and then assess the capability of organization to generate future cash flows. The income statement offer opportunity to compare one business to another on the following specific sections:
The section of the gross profit shows revenues, that is, the sales of goods or services minus the cost of goods, or the amount that was spent on producing and acquiring the items sold. The gross profit section does not include other expenses, but give an overview of whether the business is pricing its products correctly or whether it is discounting too much(Arthur & Co., 2012).
This section show how much it costs to do business, besides what the business spends on producing its products and services. These include: advertising, utilities, depreciation, benefits, salaries among other operating costs.Part of the items in this section are seasonal or may be variable as considered.
The net earnings are the bottom line for a specific reporting period. This is because this category displays the much of profit or loss achieved by the business. The figures are compared with previous periods and also against the budget of the business (Cumming, Hock &Chasteen, 2009). The analysis of the net earnings figure is undertaken in relation to the expectations for the stage and type of the company in consideration.
Earnings Per Share
Due to the significance of earnings per share (EPS),it is required that it be disclosed on the presentation of the organization’s income statement. A business reporting any of the irregular items should also report the EPS for the items either in the notes or in the statement. The two forms of reporting EPS are:
Basic:In this form “weighted average of shares outstanding” are inclusive of only actual stocks outstanding.
Diluted:This case calculates the “weighted average of shares outstanding” as if all the warrants, stock options, convertible bonds, and other securities which would be transformed into shares are transformed.
Methods of Preparing Income Statements
The income statement of an organization can be prepared in either of the methods named single or multi-step.
The Single-Step Income Statement
The method is prepared by starting by setting revenue items apart from the expenses and then subtracting total expenses from the total revenues to get the net income. The method is straightforward in its application and thus, the name “single-step.” The company’s revenues constitute any initiative the business undertakes to make money and ensure expansion of market share –which includes selling of merchandise and undertaking provision of services along with selling and buying investments (Cumming, Hock &Chasteen, 2009). Its expenses range from shipping and employee health benefits to computer maintenance and network protection, salaries, utilities, property insurance, business travel and interest.
Multi-Step Income Statement
The multi-step statement of profit and loss shows the analytical prominence to intermediate indicators, for instance, gross profit and he operating income. One should start with sales revenue then subtract merchandise expense to calculate gross profit. Operating expenses is then deducted from the last item to give operating income, that is, income from continuing operations. This figure helps in computing the pretax income by adding and subtracting non-operating items –for example the cumulative effect of the changes in accounting and the sale of business units and also the unusual losses and gains (Kieso, Weygandt& Warfield, 2011). The net income is then computed as the figure attained from subtracting fiscal dues from pretax income.
Conceptual Guidelines for Reporting Income
The income reporting guidelines is usually a pendulum in changing directions. At various times of the reporting periods, businesses have explored on two major guidelines/ concepts for income reporting. The first concept which is the Current Operating Performance Concept which ensures that nonrecurring and extraordinary losses and gains are excluded from income. This is because, those losses and gains are taken directly to equity and evade the income statement, which is referred to as “dirty surplus” method. Secondly, the all-inclusive (comprehensive) concept, ensures that all the items inclusive of the nonrecurring and extraordinary losses and gains, are taken to the income statement; resulting to a “clean surplus,” because all the losses and gains are reported in the income statement.
Handling Special Types of Income Statements Items
On an income statement, special items are line items reported separately from the usual income of the business because of their irregular feature. These particular types of items seem strange, one-off occurrences or accounting phenomenon which may never occur again (Arthur & Co., 2012). These irregular items are presented separately to make that users can identify what constitutes the income from continued business results. If in any case the special items are include on the income statement computation, the income tax expense or savings related to each of the items is ne against the special item in order to report it after tax.