Accounting and Finance Foundations

Unit 7

Accounting and Finance Foundations Unit 7: Financial Statements 543

Financial Statements Student Guide

Chapter 18

Lesson 18.1 The Income Statement

The income statement is a report of a company’s operating performance, in financial terms, over a period

of time. The income statement contains five major sections: revenue, cost of goods sold, gross profit,

operating expenses, and net income (or net loss).

The heading on the income statement specifies four things:

n    the name of the company

n    the name of the financial statement

n    the date

n    unit of measure

The heading must contain all the above information; however, the date may change based on the type of

financial statement. The income statement reporting date is for a specified period of time. The time period

covered by the financial statement is called the accounting period.

Revenues – Expenses = Net Income

Elements

Companies earn revenues from the sales of goods or services to customers. Revenues normally are

reported for goods or services that have been sold to a customer whether or not they have yet paid for

them. Many retail stores, such as fast food restaurants, receive payment immediately at the time of sale.

Some stores, though, receive a promise of future payment called an accounts receivable, which is later

collected in cash. In either case, the business recognizes total sales (both cash and accounts receivable) as

revenue for the period. Some businesses also issue refunds or price allowances to customers for returned

goods. These sales returns and allowances decrease the amount of sales, so they are subtracted from

revenue.

Net Sales = Sales – Sales Returns and Allowances

Expenses represent the dollar amount of resources the entity used to earn revenues during the period.

Expenses reported in one accounting period may actually be paid for in another accounting period. Some

expenses require the payment of cash immediately, while others require payment at a later date.

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