Income Statement Format
A proper income statement format comes in two varieties. The first one discussed here is the single step income statement and the second is the multiple step income statement format. There are key differences between the two and you should know when to use each for the right situation. The downloadable spreadsheet is at the end of the tutorial.
The single step income statement format is ideal when there is not much complexity to the business. When your sources of revenue and expenses are small in number, the single step income statement will most likely suffice. It basically groups the aforementioned two categories together to give you a generalized picture of income before taxes. At a very top level, you’d be looking at:
Revenue – Expenses = Income Before Taxes – Tax Expense = Net Income
Even if you had multiple revenue streams and multiple expense line items and you proceeded to group them together, it would still be within the confines of a single step income statement format.
Here is what a basic single step income statement format looks like:
(Downloadable spreadsheet is at the end of the tutorial)
As you can see the single step income statement format only gives you a very broad idea of what the inflows and outflows are. If the business activities you’re involved with are bit more complex, you may very well benefit from knowing other information that can help you make better decisions. This is where the multi step income statement format is useful.
The multi step income statement separates the operating line items from the non-operating line items. At the operating activities level, line items pertaining to the core operations of the business are grouped at the top (revenues) and sub-grouped (expenses) to give you more insight. Valuable information such as gross profit and operating profit are also derived in a multi step income statement.
*Note: Selling Expenses contain items that have a direct impact on generating sales. This would include salaries and benefits paid to the sales force, advertising costs that result in sales and the like. The salaries paid to management, technical professionals, secretaries, etc. are part of Administrative Expenses since they don’t have a direct impact in generating sales.
Non-operating activities are grouped at the bottom and those line items pertain to things that are not principal activities of the business’ operations. For instance, if a toy manufacturer winds up selling outdated equipment, the gain or loss on that sale would be reported in the non-operating section as either Other Income or Other Loss.
Here is an example of the multi step income statement format:
Other key elements you’d expect to find in a multi-step income statement are sections that break out continuing operations from discontinued operations, cumulative effects on changes in accounting policy and extraordinary items that impacted the business. By accounting standards, extraordinary items are those that are unusual in nature and have infrequent occurrence. For example, if one of the toy manufacturer’s plants was destroyed because of some unforeseen natural disaster, that would qualify as something that is unusual and infrequent and would be reported as an extraordinary loss.
For much larger organizations, the income statement format might also include what’s known as Other Comprehensive Income (Loss). This section includes income or loss that has not yet been realized but material enough to warrant representation. Examples of items that fall in to this category are gains and losses for foreign exchange currency translation and unrealized gains or losses from investments like stocks (marketable securities).
The general format of an income statement you might expect to find for large corporations might look like the following: (Continue Reading)
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