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Measuring and Reporting Financial Performance

Income Statement formal statement that shows the results of operations ofa business entity for a given period of time.

It shows whether the profit-goal of the company is attained or not.Performance

Net profit or net income is frequently used as a measure of the performance of a

business entity.

The computation of net income or loss of a going-concern is an important function

of financial accounting.

Income

Income > Expenses = Net Income Income < Expenses = Net Loss

Elements of the Income Statement

Income Expenses nominal accounts

Income

It represents increases in economic benefits, during the accounting period,related to increases of assets and decreases of liabilities, or both.

It will ultimately increase the owners equity. The definition of income encompasses both revenues and gains. Income also includes unrealized gains, for example, gain arising from the

revaluation of marketable securities, or gain resulting from an increase in the

value of property, plant and equipment.

Revenues These are inflows of assets or outflows of liabilities arising from the primary

activities

of a business entity.

Examples: sales revenue

service revenue

professional fees

Gains

These may also arise from activities that are considered as ordinary thoughthese activities are not part of the normal operations of the business entity.

These may also result from disposing assets other than the ones that arebeing sold in the normal course of operations of the business entity.

Expenses

These are decreases in economic benefits during the accounting period, inthe form of outflows or depletions of assets or in the form of incurring

liabilities.

These will ultimately decrease owners equity.Losses

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These also represent decreases in economic benefits and as such, they are nodifferent in nature from expenses.

Losses arise from activities that are considered as ordinary although they arenot part of the normal operations of the business entity.

These may also result from accidents or disasters such as fire and flood anddisposal of non-current assets.

Contents of Income Statement

Heading1stline registered name of the business

entity

2nd line title of the statement Income

Statement

3rd line period of time it covers.

Contents of Income Statement

Body1. Revenues and other operating income

2. Operating expenses

3. Results of operating activities

4. Finance Costs

5. Income tax expense

6. Net income or net loss for the period

Operating Expenses

Cost of Sales Marketing and Distribution Expenses (Selling Expenses)

Store supplies expense

Advertising expense

Delivery expense

Salesmens commission

General and Administrative ExpensesOffice salaries expense

Rent expense

Depreciation office equipment

Doubtful accounts expense

Representation expense

Forms of Income Statement

Nature of Expense MethodExpenses are aggregated according to nature.

Function of Expense Method

Expenses are classified according to their functions, such as Cost of Sales,

Distribution Costs, General and Administrative Expenses.