The income statement or profit and loss account tells you whether the company is making a profit, that is, it has positive net income. (It is also called a profit and loss account and an operating statement). It shows a company’s profitability for a specific period of time - monthly, quarterly, and annually. How does an income statement present this profitability picture?

The income statement is a report that presents revenue, expenses and net income or net loss for a business for a period of time.

The income statement is divided into two parts. The first part is known as the “heading” and the second part as the “body” of the report. The heading of the income statement answers three questions:

Whose business is it? What statement is it? What period does it cover?

The body of the income statement lists revenues and expenses. A comparison of these two items will show either net income or net loss. When total revenue exceeds total expenses, the excess represents the net income. When the total expenses exceed the total revenue, the difference represents a net loss.

The date assigned to the income statement covers a period of time. This is true of all income statements regardless of whether they are prepared for an accounting period or on an interim basis.

The income statement starts with a company’s revenue: how much money has come from its operations. This money is received from selling goods and services and other items of income (such as dividends and interest). Various expenses – the cost of making and storing the goods, depreciation of plant and equipment, interest and taxes – are then subtracted from the revenue. The bottom line – what is left over – is the net income or profit.

The balance sheet shows the financial strength of a company by reflecting its financial position at a given date. The income statement may be of greater interest to investors because it shows the result of the operating activities for the whole year.

The figure given for a single year is not really the whole story. The historical record for a number of years is more important than the figure of any single year. The example (a fragment of the income statement) given below includes two years in the income statement. The comparison will give an idea to the managers, investors and employees of the company’s performance over the years. Has the company improved its performance or not?

Years ended December 31, 2014 and 2015 (dollars in thousands)

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Task 6

Read the text. Decide whether these statements are TRUE, FALSE or NOT STATED:

Every business exists to earn a profit. The profit is realized through revenue earned by an organization as a result of the sale of a service or product by that business.

Profit and revenue are not the same. Profit represents the income that a business has earned after certain deductions have been made from revenues.

Every business, regardless of its nature, has to incur certain costs in order to operate. They are known as expenses. Expenses are generally known as the “costs of doing business”. Examples of business expenses are rent expense, insurance expense, salary expense and supplies expense. Expenses are necessary, because they have to be incurred to obtain revenue which will be translated into profits for the business.

The profit and loss account (P&L), called the income statement in the US, shows the profit or loss a company has made over a period of time. The ratios investors look at most often, such as the EPS and yield are calculated using numbers from the P&L.

In a simple case the profit or loss equals the increase or decrease in the company’s assets as shown on the balance sheet. This is rarely exactly true and the statement of total gains and losses reconciles the P&L to the changes in equity shown on the balance sheet.

The P&L can be misleading and there are a number of accounting techniques that can shift losses (or gains, although that is rarer) from the P&L to the balance sheet. The P&L should be looked at together with the notes, the cash flow statement (which is harder to manipulate) and the other accounting statements.

The shortest possible P&L would be: sales less costs = total profit.

In accordance with the accrual principle, costs and revenues are arranged in such a way that, for example, sales and purchases made on credit during a year, but perhaps not yet paid for, will be included in the P&L for the year.

The most detailed profit and loss account is given in the annual report, but UK listed companies are required to make annual and half year results announcements as well. The full year results statement is shorter and covers the same period as the annual report, but it is released earlier.

Many companies make quarterly announcements, as companies in the US and many other countries are required to. In addition, the P&L (perhaps together with other information) usually gives us enough information to calculate several other profit numbers such as EBITDA.

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