Income Statement

Income Statement

Quick Study Sheet

Revenues:

4 criteria that must be met for revenue to be recognized

1)  Delivery of goods or service
2)  evidence of arrangement for customer payment
3)  The price is fixed and determinable
4)  Collection is reasonably assured

Revenue is recognized when earned – NOT when cash is received.

Expenses:

1)  use up an asset
2)  service provided to the company that must be paid for

Expenses are recognized when incurred – NOT when they are paid

The Matching Principle:

Expenses incurred to generate revenues must be recognized in the same period as the revenue

Accrual Basis of Accounting:

Revenues are recorded when earned and expenses are recorded when incurred. When cash is received or paid DOES NOT Matter

Format of the Single Step Income Statement: For a period of time

Total revenues – list them out and total them
Total expenses – list them out and total them
Total revenues less total expenses = net income

Format of the Multi-step income statement: For a period of time

Sales
– Cost of Goods Sold              
=Gross Profit
– Operating Expenses:
     General and Administrative – Selling
     Research & Development – Restructuring
= Operating Income
+ – Other Revenues & Expenses: (gains/losses/interest/rent income)
= Income Before Taxes:
– Tax Expense                                        
= Income from Continuing Operations
+ – Discontinued Operations:
                                                                 
=  Net Income

Operating income:  earned from primary day to day operations
Income from continuing operations:  earnings from all activities expected to continue        
Discontinued Operations:  Selling or disposing of a major part of the business
Net Income:  Total earnings of the company for this period

Accrual Basis – required by GAAP
Revenues:  record when earned; the goods or services are provided
Expenses:  record when incurred; use up an asset or a service was provided to the company