Understanding the Income Statement Format and Elements

School: Arizona State University - Course: ACC 340 - Subject: Accounting

CHAPTER 3 Income Statement and Related Information INCOME STATEMENT Uses:1. Evaluate the past performance of the company. 2. Provide a basis for predicting future performance 3. Provide a basis for predicting future performance Limitations:1. Companies omit items from the income statement that they cannot measure reliably 2. Income numbers are affected by the accounting methods employed 3. Income measurement involves judgment (estimate of bad debt) ELEMENTS OF THE INCOME STATEMENT Income Measurement: Net Income is a summary of revenues/expenses/gains/losses grouped by "_________________" (i.e. Operating vs. Non-Operating, Product vs. Period Cost) 1.Revenues- Inflows of assets (cash or accounts receivables) or the settlement of liabilities (unearned revenue) as a result of Delivering Goods/ Performing Services that are a part of on- going operations. 2.Expenses- Outflows of resources (i.e. the "using up" of the cost of resources), from the delivery of goods/performance of services that constitutes the entity's on-going operations. 3.Gains & Losses- arise from transactions incidentalto the firm Gains - increases in equity (net assets) from peripheral transactions Losses - decreases in equity (net assets) from peripheral transactions INCOME STATEMENT FORMAT 1.Single-Step Income Statement a.Deduct Total Expenses & Losses from Total Revenues & Gains to get Net Income. b.No separate disclosure for Gross Profit or Operating Income. c.No distinction between operating and non-operating income. d.Main advantage is simplicity. 2.Multi-Step Income Statement a.Separates Operating from Non-Operating activities and classifies expenses by function (i.e. COGS, Selling Expenses, Administrative Expenses). b.Presents subtotalsfor Gross Profitand Operating Income beforeOther Revenue & Gains and Other Expenses and Losses. c.Intermediate components are highlighted for easier performance evaluation. 1 Spring 2023 - © Erin Jordan, Ph.D., Arizona State UniversityACC 340 - Chapter 3 - Page

FYI... Examples of Accounts Considered Selling Expenses and Administrative Expenses Selling Expenses:Administrative Expenses: Sales CommissionsOfficers' Salaries Expense Sales Office SalariesOffice Salary Expense Travel & Entertainment ExpenseLegal & Professional Expense Advertising ExpenseUtility Expense Freight Out and Shipping ExpenseInsurance Expense Shipping Supplies ExpenseMiscellaneous Expense Postage and Stationary ExpensePostage and Stationary Expense Telephone and Internet ExpenseTelephone and Internet Expense Depreciation of Sales EquipmentDepreciation of Office Equipment Depreciation of Building for SellingDepreciation of Building for Admin