Income statement – P&L

"Profit and loss" redirects here. For other uses, see Profit and Loss (disambiguation).
"Top line" redirects here. For the 1988 Italian film, see Alien Terminator. For the term in dancing, see Glossary
of partner dance terms § Top line.
Part of a series on
Accounting

 Historical cost
 Constant purchasing power
 Management
 Tax

Major types

Key concepts
Selected accounts
Accounting standards
Financial statements
Bookkeeping
Auditing
People and organizations
Development
Misconduct
 v
 t
 e

This article has multiple issues. Please help improve it or discuss these issues on the talk page. (Learn how and
when to remove these template messages)
The examples and perspective in this article may not represent a worldwide view of the subject. (December
2009)
This article needs additional citations for verification. (December 2009)

Sankey Diagram - Income Statement (by Adrián Chiogna)

An income statement or profit and loss account[1] (also referred to as a profit and loss statement (P&L),
statement of profit or loss, revenue statement, statement of financial performance, earnings statement,
statement of earnings, operating statement, or statement of operations)[2] is one of the financial statements of a
company and shows the company's revenues and expenses during a particular period.[1]

It indicates how the revenues (also known as the “top line”) are transformed into the net income or net profit
(the result after all revenues and expenses have been accounted for). The purpose of the income statement is to
show managers and investors whether the company made money (profit) or lost money (loss) during the period
being reported.

An income statement represents a period of time (as does the cash flow statement). This contrasts with the
balance sheet, which represents a single moment in time.

Charitable organizations that are required to publish financial statements do not produce an income statement.
Instead, they produce a similar statement that reflects funding sources compared against program expenses,
administrative costs, and other operating commitments. This statement is commonly referred to as the statement
of activities.[3] Revenues and expenses are further categorized in the statement of activities by the donor
restrictions on the funds received and expended.

The income statement can be prepared in one of two methods.[4] The Single Step income statement totals
revenues and subtracts expenses to find the bottom line. The Multi-Step income statement takes several steps to
find the bottom line: starting with the gross profit, then calculating operating expenses. Then when deducted
from the gross profit, yields income from operations.

Adding to income from operations is the difference of other revenues and other expenses. When combined with
income from operations, this yields income before taxes. The final step is to deduct taxes, which finally
produces the net income for the period measured.

Contents
 1 Usefulness and limitations of income statement
o 1.1 Operating section
o 1.2 Non-operating section
o 1.3 Irregular items
o 1.4 Disclosures
o 1.5 Earnings per share
 2 Sample income statement
 3 Bottom line
 4 Requirements of IFRS
o 4.1 Items and disclosures
 5 See also
 6 References

Usefulness and limitations of income statement

Income statements may help investors and creditors determine the past financial performance of the enterprise,
predict the future performance, and assess the capability of generating future cash flows using the report of
income and expenses.

However, information of an income statement has several limitations:

  Items that might be relevant but cannot be reliably measured are not reported (e.g., brand recognition
and loyalty).
 Some numbers depend on accounting methods used (e.g., using FIFO or LIFO accounting to measure
inventory level).
 Some numbers depend on judgments and estimates (e.g., depreciation expense depends on estimated
useful life and salvage value).

- INCOME STATEMENT GREENHARBOR LLC -

For the year ended DECEMBER 31 2010

€ €
Debit Credit
Revenues
GROSS REVENUES (including INTEREST income) 296,397
--------
Expenses:
ADVERTISING 6,300
BANK & CREDIT CARD FEES 144
BOOKKEEPING 2,350
SUBCONTRACTORS 88,000
ENTERTAINMENT 5,550
INSURANCE 750
LEGAL & PROFESSIONAL SERVICES 1,575
LICENSES 632
PRINTING, POSTAGE & STATIONERY 320
RENT 13,000
MATERIALS 74,400
TELEPHONE 1,000
UTILITIES 1,494
--------
TOTAL EXPENSES (195,515)
--------
NET INCOME 100,882

Guidelines for statements of comprehensive income and income statements of business entities are formulated
by the International Accounting Standards Board and numerous country-specific organizations, for example the
FASB in the U.S..

Names and usage of different accounts in the income statement depend on the type of organization, industry
practices and the requirements of different jurisdictions.

If applicable to the business, summary values for the following items should be included in the income
statement:[5]

Operating section

 Revenue - Cash inflows or other enhancements of assets (including accounts receivable) of an entity
during a period from delivering or producing goods, rendering services, or other activities that constitute
the entity's ongoing major operations. It is usually presented as sales minus sales discounts, returns, and
allowances. Every time a business sells a product or performs a service, it obtains revenue. This often is
referred to as gross revenue or sales revenue.[6]
 Expenses - Cash outflows or other using-up of assets or incurrence of liabilities (including accounts
payable) during a period from delivering or producing goods, rendering services, or carrying out other
activities that constitute the entity's ongoing major operations.
o Cost of Goods Sold (COGS) / Cost of Sales - represents the direct costs attributable to goods
produced and sold by a business (manufacturing or merchandizing). It includes material costs,
 direct labour, and overhead costs (as in absorption costing), and excludes operating costs (period
costs) such as selling, administrative, advertising or R&D, etc.
o Selling, General and Administrative expenses (SG&A or SGA) - consist of the combined
payroll costs. SGA is usually understood as a major portion of non-production related costs, in
contrast to production costs such as direct labour.
 Selling expenses - represent expenses needed to sell products (e.g., salaries of sales
people, commissions and travel expenses, advertising, freight, shipping, depreciation of
sales store buildings and equipment, etc.).
 General and Administrative (G&A) expenses - represent expenses to manage the
business (salaries of officers / executives, legal and professional fees, utilities, insurance,
depreciation of office building and equipment, office rents, office supplies, etc.).
o Depreciation / Amortization - the charge with respect to fixed assets / intangible assets that
have been capitalised on the balance sheet for a specific (accounting) period. It is a systematic
and rational allocation of cost rather than the recognition of market value decrement.
o Research & Development (R&D) expenses - represent expenses included in research and
development.

Expenses recognised in the income statement should be analysed either by nature (raw materials, transport
costs, staffing costs, depreciation, employee benefit etc.) or by function (cost of sales, selling, administrative,
etc.). (IAS 1.99) If an entity categorises by function, then additional information on the nature of expenses, at
least, – depreciation, amortisation and employee benefits expense – must be disclosed. (IAS 1.104) The major
exclusive of costs of goods sold, are classified as operating expenses. These represent the resources expended,
except for inventory purchases, in generating the revenue for the period. Expenses often are divided into two
broad sub classicifications selling expenses and administrative expenses.[6]

Non-operating section

 Other revenues or gains - revenues and gains from other than primary business activities (e.g., rent,
income from patents, goodwill). It also includes unusual gains that are either unusual or infrequent, but
not both (e.g., gain from sale of securities or gain from disposal of fixed assets)
 Other expenses or losses - expenses or losses not related to primary business operations, (e.g., foreign
exchange loss).
 Finance costs - costs of borrowing from various creditors (e.g., interest expenses, bank charges).
 Income tax expense - sum of the amount of tax payable to tax authorities in the current reporting period
(current tax liabilities/ tax payable) and the amount of deferred tax liabilities (or assets).

Irregular items

They are reported separately because this way users can better predict future cash flows - irregular items most
likely will not recur. These are reported net of taxes.

 Discontinued operations is the most common type of irregular items. Shifting business location(s),
stopping production temporarily, or changes due to technological improvement do not qualify as
discontinued operations. Discontinued operations must be shown separately.

Cumulative effect of changes in accounting policies (principles) is the difference between the book value of
the affected assets (or liabilities) under the old policy (principle) and what the book value would have been if
the new principle had been applied in the prior periods. For example, valuation of inventories using LIFO
instead of weighted average method. The changes should be applied retrospectively and shown as adjustments
to the beginning balance of affected components in Equity. All comparative financial statements should be
restated. (IAS 8)
However, changes in estimates (e.g., estimated useful life of a fixed asset) only requires prospective changes.
(IAS 8)

No items may be presented in the income statement as extraordinary items under IFRS regulations, but are
permissible under US GAAP. (IAS 1.87) Extraordinary items are both unusual (abnormal) and infrequent, for
example, unexpected natural disaster, expropriation, prohibitions under new regulations. [Note: natural disaster
might not qualify depending on location (e.g., frost damage would not qualify in Canada but would in the
tropics).]

Additional items may be needed to fairly present the entity's results of operations. (IAS 1.85)

Disclosures

Certain items must be disclosed separately in the notes (or the statement of comprehensive income), if material,
including:[5] (IAS 1.98)

 Write-downs of inventories to net realisable value or of property, plant and equipment to recoverable
amount, as well as reversals of such write-downs
 Restructurings of the activities of an entity and reversals of any provisions for the costs of restructuring
 Disposals of items of property, plant and equipment
 Disposals of investments
 Discontinued operations
 Litigation settlements
 Other reversals of provisions

Earnings per share

Because of its importance, earnings per share (EPS) are required to be disclosed on the face of the income
statement. A company which reports any of the irregular items must also report EPS for these items either in the
statement or in the notes.

There are two forms of EPS reported:

 Basic: in this case “weighted average of shares outstanding” includes only actual stocks outstanding.
 Diluted: in this case “weighted average of shares outstanding” is calculated as if all stock options,
warrants, convertible bonds, and other securities that could be transformed into shares are transformed.
This increases the number of shares and so EPS decreases. Diluted EPS is considered to be a more
reliable way to measure EPS.

Sample income statement

The following income statement is a very brief example prepared in accordance with IFRS. It does not show all
possible kinds of accounts, but it shows the most usual ones. Differences between IFRS and US GAAP would
affect the interpretation of the following sample income statements.

Fitness Equipment Limited

INCOME STATEMENTS
(in millions)

Year Ended March 31, 2019 2020 2021

----------------------------------------------------------------------------------
Revenue £14,580.2 £11,900.4 £8,290.3
 Cost of sales (6,740.2) (5,650.1) (4,524.2)
------------- ------------ ------------
Gross profit 7,840.0 6,250.3 3,766.1
------------- ------------ ------------

SGA expenses (3,624.6) (3,296.3) (3,034.0)

------------- ------------ ------------
Operating profit 4,215.4 2,954.0 732.1
------------- ------------ ------------

Gains from disposal of fixed assets 46.3 - -

Interest expense (119.7) (124.1) (142.8)
------------- ------------ ------------
Profit before tax 4,142.0 2,829.9 589.3
------------- ------------ ------------

Income tax expense (1,656.8) (1,132.0) (235.7)

------------- ------------ ------------
Profit (or loss) for the year £ 2,485.2 £ 1,697.9 £ 353.6
DEXTERITY INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In millions)

Year Ended December 31, 2019 2020

2021

------------------------------------------------------------------------------------------
----
Revenue 36,525.9 29,827.6 21,186.8
Cost of sales (18,545.8) (15,858.8)
(11,745.5)
----------- -----------
------------
Gross profit 17,980.1 13,968.8
9,441.3
----------- -----------
------------

Operating expenses:
Selling, general and administrative expenses (4,142.1) (3,732.3)
(3,498.6)
Depreciation (602.4) (584.5)
(562.3)
Amortization (209.9) (141.9)
(111.8)
Impairment loss (17,997.1) —
—
----------- -----------
------------
Total operating expenses (22,951.5) (4,458.7)
(4,172.7)
----------- -----------
------------
Operating profit (or loss) (-4,971.4) 9,510.1
5,268.6
----------- -----------
------------

Interest income 25.3 11.7

12.0
Interest expense (718.9) (742.9)
(799.1)
 ----------- -----------
------------
Profit (or loss) from continuing operations
before tax, share of profit (or loss) from
associates and non-controlling interest (5,665.0) 8,778.9 4,481.5
----------- -----------
------------

Income tax expense (1,678.6) (3,510.5)

(1,789.9)
Profit (or loss) from associates, net of tax (20.8) 0.1
(37.3)
Profit (or loss) from non-controlling interest,
net of tax (5.1) (4.7)
(3.3)
----------- -----------
------------
Profit (or loss) from continuing operations (7,348.7) 5,263.8 2,651.0
----------- -----------
------------

Profit (or loss) from discontinued operations,

net of tax (1,090.3) (802.4)
164.6
----------- -----------
------------
Profit (or loss) for the year (8,439) 4,461.4 2,486.4

Bottom line
“Bottom line” is the net income that is calculated after subtracting the expenses from revenue. Since this forms
the last line of the income statement, it is informally called “bottom line.” It is important to investors as it
represents the profit for the year attributable to the shareholders.

After revision to IAS 1 in 2003, the Standard is now using profit or loss for the year rather than net profit or
loss or net income as the descriptive term for the bottom line of the income statement.

Requirements of IFRS
On 6 September 2007, the International Accounting Standards Board issued a revised IAS 1: Presentation of
Financial Statements, which is effective for annual periods beginning on or after 1 January 2009.

A business entity adopting IFRS must include:

 a statement of comprehensive income or

 two separate statements comprising:

1. an income statement displaying components of profit or loss and

2. a statement of comprehensive income that begins with profit or loss (bottom line of the income
statement) and displays the items of other comprehensive income for the reporting period.
(IAS1.81)

All non-owner changes in equity (i.e., comprehensive income) shall be presented either in the statement of
comprehensive income or in a separate income statement and a statement of comprehensive income.
Components of comprehensive income may not be presented in the statement of changes in equity.
Comprehensive income for a period includes profit or loss (net income) for that period and other comprehensive
income recognised in that period.

All items of income and expense recognised in a period must be included in profit or loss unless a Standard or
an Interpretation requires otherwise. (IAS 1.88) Some IFRSs require or permit that some components to be
excluded from profit or loss and instead to be included in other comprehensive income. (IAS 1.89)

Items and disclosures

The statement of comprehensive income should include:[5] (IAS 1.82)

1. Revenue
2. Finance costs (including interest expenses)
3. Share of the profit or loss of associates and joint ventures accounted for using the equity method
4. Tax expense
5. A single amount comprising the total of (1) the post-tax profit or loss of discontinued operations and (2)
the post-tax gain or loss recognised on the disposal of the assets or disposal group(s) constituting the
discontinued operation
6. Profit or loss
7. Each component of other comprehensive income classified by nature
8. Share of the other comprehensive income of associates and joint ventures accounted for using the equity
method
9. Total comprehensive income

The following items must also be disclosed in the statement of comprehensive income as allocations for the
period: (IAS 1.83)

 Profit or loss for the period attributable to non-controlling interests and owners of the parent
 Total comprehensive income attributable to non-controlling interests and owners of the parent

No items may be presented in the statement of comprehensive income (or in the income statement, if separately
presented) or in the notes as extraordinary items.

See also
 Comprehensive income
 Cash flow
 Trading statement
 Profit model
 Statement of changes in equity
 Model audit
 International Financial Reporting Standards (and their requirements)
 PnL Explained - Profit and loss explained report

References
1.

 Professional English in Use - Finance, Cambridge University Press, p. 10

  Helfert, Erich A. (2001). "The Nature of Financial Statements: The Income Statement". Financial
Analysis - Tools and Techniques - A Guide for Managers. McGraw-Hill. p. 40. doi:10.1036/0071395415.
ISBN 9780071378345.
  "ANALYSIS OF FASB 117 (Financial Accounting Standards Board) "FINANCIAL STATEMENTS OF
NOT-FOR-PROFIT ORGANIZATIONS"".
  Warren, Carl (2008). Survey of Accounting. Cincinnati: South-Western College Pub. pp. 128–132.
ISBN 978-0-324-65826-2.
  "Presentation of Financial Statements" International Accounting Standards Board. Accessed 17 July
2010.

6.  [citation needed]

 Harry I. Wolk, James L. Dodd, Michael G. Tearney. Accounting Theory: Conceptual Issues in a
Political and Economic Environment (2004). ISBN 0-324-18623-1.
 Angelico A. Groppelli, Ehsan Nikbakht. Finance (2000). ISBN 0-7641-1275-9.
 Barry J. Epstein, Eva K. Jermakowicz. Interpretation and Application of International Financial
Reporting Standards (2007). ISBN 978-0-471-79823-1.
 Jan R. Williams, Susan F. Haka, Mark S. Bettner, Joseph V. Carcello. Financial & Managerial
Accounting (2008). ISBN 978-0-07-299650-0.


 v
 t
 e

Accounting

Authority control

Categories:

 Income statement
 Accounting terminology