1. General Accounting
Introduction to
Income Statement

2. What are
Financial
Statements?
2
• Used by managers, shareholders,
investors, lenders and the government
for different reasons and purposes
• Show the financial status of an entity
• Comprised of income statement,
balance sheet and cash flow statement
• Also known as earnings statement and
profit and loss statement

3. What are
Financial
Statements?
3
• Detail the business’ financial
performance for a certain month,
quarter or year
• Rehashes the generated income and
deducts the incurred expenditures in
the derivation of that income
• Illustrate the revenue-generating
capacity and financial status of an
entity

4. Importance of
Income
Statement
4
• Addresses queries related to the financial
performance of a business
• Describes the results of business
transactions that generate income in
exchange for goods or rendered services
• Reflects incurred expenditures and
indicates the net profit
• Required by the IRS

5. Preparing an
Income
Statement
5
• In constructing an income statement,
the following should be indicated:
- gross profit
- operating profit
- profit before taxes
- net profit

6. Preparing an
Income
Statement
6
• Gross profit is determined by deducting
net sales from the cost of goods sold
Gross Profit = Net Sales - Cost of Goods Sold
Net Operating Profit = Gross Profit - Selling and
Administrative Expenses
Profit Before Taxes = Net Operating Profit + (Other
Income - Other Expenses)
Net Profit/Loss = Profit Before Taxes - Income Taxes

7. Preparing an
Income
Statement
7
• Net Sales are overall sales for the
accounting period minus the
allowances for the trade discounts and
returns
Net Sales = Gross Sales - (Return and
Allowances)

8. Preparing an
Income
Statement
8
• Cost of Goods Sold is the total amount
paid for the sold products throughout
the accounting period
Cost of Goods Sold = Inventory at the
Start + Purchased Materials - Ending
Inventory

9. Preparing an
Income
Statement
9
• Selling and Administrative Expenses
are the two kind of expenses reported
on the income statement
• Selling expenses are incurred
expenditures throughout the marketing
process
• Administrative expenses are
expenditures during the business
operation excluding the sales of goods

10. Preparing an
Income
Statement
10
• Other income and expenses are
income or expense items that are not
directly associated with the business
proceedings
• Other incomes include earning from
interests, dividends and royalties
• Other expenses are unforeseen losses
such as the loss from the disposition of
equipment or machineries

11. Preparing an
Income
Statement
11
• Income taxes are inevitable part of any
business transaction and can be taxed
by local, state and/or federal
government
• Net income is the last item on the
financial statement and shows the
gained base profit by an entity during
the specified accounting period

12. Issues on
Financial
Statement
12
• Items such as brand recognition,
organizational reputation, and
customer loyalty are important and
relevant business items but are not
evaluated and reported on the income
statement.
• The income statement cannot specify
the owner’s assets and liabilities, and
the Accounts Receivable and Payable.

13. Issues on
Financial
Statement
13
• By using different valuation methods
permitted in accounting, various profit
results will be obtained.
• Some values recorded on the income
statement are based on judgments and
appraisals.

14. Good fortune is what
happens when
opportunity meets with
planning.
- Thomas Alva Edison
14
BKM Sowan Horan, LLP
15301 Dallas Parkway, Suite 960
Dallas, Texas 75001
Phone: 214-545-3965
Fax: 214-545-3966
www.bkmsh.com
For more information about Introduction to Income Statement, please visit: http://bit.ly/BKMSH-Income-Statement