UNDERSTANDING

INCOME
STATEMENT
AHMED ARIF
UCP BUSINESS SCHOOL
 INCOME STATEMENT
The income statement communicates how much revenue the company generated
during a period and what costs it incurred in connection with generating that
revenue.
The income statement is also called the statement of operations or statement of
earnings or Statement of Profit and Loss
 INCOME STATEMENT ANALYSIS
Investment analysts intensely scrutinize companies income statements.
Equity analysts are interested in them because equity markets often reward relatively
high - or low earnings growth companies with above - average or below - average
valuations, respectively.
Fixed income analysts examine the components of income statements, past and
projected, for information on companies abilities to make promised payments on
their debt over the course of the business cycle.
Corporate financial announcements frequently emphasize income statements more
than the other financial statements.
 COMPONENTS AND FORMAT OF THE
INCOME STATEMENT
Revenue refers to amounts charged for the delivery of goods or services in the
ordinary activities of a business.
The term net revenue means that the revenue number is shown after adjustments
(e.g., for estimated returns or for amounts unlikely to be collected).
Revenue is often used synonymously with sales
COMPONENTS AND FORMAT OF THE
INCOME STATEMENT
 COMPONENTS AND FORMAT OF THE
INCOME STATEMENT
Net Income is often referred as bottom line
In addition to presenting the net income, income statements also present subtotals
that are significant to users of financial statements.
Single Step Income Statement
Multi Step Income Statement
Gross Profit
Operating Profit
 REVENUE RECOGNITION

Revenue is top line

Income is increases in economic benefits during the accounting period in the form
of inflows or enhancements of assets or decreases of liabilities that result in
increases in equity, other than those relating to contributions from equity
participants. 8nue is the top line in an income statement.
International Financial Reporting Standards use the term income to include
revenue and gains.
Gains are similar to revenue; however, they arise from secondary or peripheral
activities rather than from a company s primary business activities
 REVENUE RECOGNITION

General Principles of Revenue Recognition

Revenue recognized upon sale and accounts receivables created.
Unearned Revenue
The basic revenue recognition principles promulgated by accounting
regulators deal with the definition of earned.
The International Accounting Standards Board (IASB) provides that revenue
for the sale of goods is to be recognized (reported on the income statement)
when the following conditions are satisfied.
 REVENUE RECOGNITION

The International Accounting Standards Board (IASB) provides that revenue for the sale of
goods is to be recognized (reported on the income statement) when the following
conditions are satisfied.
The entity has transferred to the buyer the significant risks and rewards of ownership of
the goods.
The entity retains neither continuing managerial involvement to the degree usually
associated with ownership nor effective control over the goods sold.
The amount of revenue can be measured reliably.
It is probable that the economic benefits associated with the transaction will flow to the
entity.
The costs incurred or to be incurred in respect of the transaction can be measured
reliably.
 REVENUE RECOGNITION
The Financial Accounting Standards Board (FASB) specifies that revenue should be
recognized when it is realized or realizable and earned.
1. There is evidence of an arrangement between buyer and seller. For instance, this would
disallow the practice of recognizing revenue in a period by delivering the product just
before the end of an accounting period and then completing a sales contract after the
period end.
2. The product has been delivered, or the service has been rendered. For instance, this
would preclude revenue recognition when the product has been shipped but the risks
and rewards of ownership have not actually passed to the buyer.
3. The price is determined, or determinable. For instance, this would preclude a company
from recognizing revenue that is based on some contingency .
4. The seller is reasonably sure of collecting money. For instance, this would preclude a
company from recognizing revenue when the customer is unlikely to pay.
 REVENUE RECOGNITION
The IASB standards separately deal with the recognition of revenue for services:
1. When the outcome of a transaction involving the rendering of services can be
estimated reliably, revenue associated with the transaction shall be
recognized by reference to the stage of completion of the transaction at the
balance sheet date.
2. The outcome of a transaction can be estimated reliably when all the following
conditions are satisfied:
i. The amount of revenue can be measured reliably.
ii. It is probable that the economic benefits associated with the transaction will flow
to the entity.
iii. The stage of completion of the transaction at the balance sheet date can be
measured reliably.
iv. The costs incurred for the transaction and the costs to complete the transaction can
be measured reliably.
 REVENUE RECOGNITION IN SPECIAL CASES

Revenue Recognition Under Special Circumstances

Long Term Contracts
Percentage of Completion Method
If outcome cannot be measured reliably, then we completed contract
method.
Installment of Sales Recognize to the extent cash is received
Barter Sales
Gross versus Net Reporting
 IMPLICATIONS FOR FINANCIAL ANALYSIS

Revenue Recognition Under Special Circumstances

Long Term Contracts
Percentage of Completion Method
If outcome cannot be measured reliably, then we completed contract
method.
Installment of Sales Recognize to the extent cash is received
Barter Sales
Gross versus Net Reporting