Income Statement

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The income statement provides information about the uses and sources of funds of an organization.  The uses of funds is composed of the expenses and the losses.  The sources of funds are the revenues and gains.  The income statement is used to determine and assess the profitability of the organization, the investment risks and the estimated future operational results and the cash flows.

Terminology.  You should understand the terminologies used in the income statement.

  • Sources of income.  The sources of income is composed of revenues and gains.  Revenues are the benefits gained from the operations while gains are those gains obtained from activities not related to the regular operating activities of the organization.
  • Uses of income.  Uses of income is composed of expenses and losses.  Expenses are those forgone assets that are used in the normal operating activities to obtain revenues while losses are those incurred from activities not related to the regular operating activities.
  • Costs.  The monetary value of fund used to acquire an asset. 
  • Presentation of the Income Statements.  This is the generally accepted presentation of the major components of the income statement.
  • Income (loss) from continuing operations.  This is the gross amount of income or loss gained from regular operating transactions (e.g., revenues and expenses), nonoperating transactions (e.g., gains and losses), and income taxes.  Note that this is before income tax expense.
  • Income (loss) from discontinued operations.  This are the results of discontinuing an operation or a segment presented net of tax. 
  • Extraordinary items.  These are the results of unusual events that should be presented separately.  these are presented net of tax.

Income from Continuing Operations in the Income Statements.  There are two acceptable presentation for the income from continuing operations in the income statement.

  • Single Step.  This method is presented by subtracting the total revenue and gains from total expenses and losses.
  • Multiple Step.  This method is presented by separately showing the income (or loss) from operating activities (i.e., revenue less expenses) and income (or loss) from nonoperating activities (i.e., gains less losses).

Discontinued Operations.  From time to time, an organization discontinues one of its component (e.g.,operating segment, a subsidiary or an asset group).  The results of the discontinuance is reported as a separate line item in the income statement following the income from of continuing operations.  The discontinued operations is composed of the results of the operation of the discontinued component, the gain or loss from discontinuance, impairment loss and the disposal of the discontinued component.

  • Components.  The components that are to be reported are those that have been sold or disposed of and those that are classified as for sale.
  • Prerequisites for reporting.  The discontinued component must be reported as a discontinued operation when it is completely eliminated from the ongoing operations and there is non-involvement of the component to the company after it has been discontinued.
  • Elements of Discontinued Operation.  The discontinued operation reported in the income statement should include the results of operation of the component, gain or loss on the disposal of the component and impairment loss of the component.  The impairment loss of the component should include the intial  loss upon impairment and the subsequent gain or increase in the fair value of the impairment after the discontinuance, net of cost to sell.
  • Depreciation.  Assets identified with the discontinued component are not depreciated.
  • Measurement and Valuation.  All assets and liabilities identifiable to the discontinued component is measure and valued at lower of its carrying value of fair value less direct cost to sell.
  • Disclosure requirements.  The results of the discontinued operations must be disclosed either on the face of the income statement or in the notes to the financial statement.  
  • Extraordinary Items.  Extraordinary events are economic transactions or events that are material in nature, not part of the ordinary transactions of the organization, not expected to recur in the foreseeable future, and not considered in the assessment of the ordinary operating results of an organization.  These events are classified using professional judgement.

Read more CPA Review Notes in Bookeepedia.

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