Income Statement Preparation

Preparing a corporate statement of income is similar to calculating your own disposable income, that is, money left over after you pay all your bills. A company's income statement, however, includes some specific items that you might not see on an individual's statement of revenues and expenses. Generally accepted accounting principles provide guidance on profitability report preparation.

Identification

An income statement is a document in which a company tells the public about how it performed over a specified period of time, say a year or quarter. The report is also known as a statement of profit and loss (P&L) or statement of income. It lists a firm's revenues, expenses and net income or loss.

Significance

A P&L is an important tool investors and the public rely on to gauge a company's profitability. Positive operating results translate into improved confidence in a company's solvency. Business partners, such as vendors, customers and lenders, are more likely to engage in long-term transactions if they are confident that a company will stay in business and thrive in the future.

Revenues

Revenues are earnings from sales, commissions and interest income from loans to business partners. To calculate total revenues, list all earnings in one section and add them up. If you work for or own a manufacturing company, deduct customer discounts and rebates from sales to calculate net sales.

Expenses

Expenses are charges that a company incurs through its operating activities. Examples include costs of materials as well as general and administrative expenses, such as rent, office supplies, utilities and salaries. Other non-cash, periodic charges include depreciation, which allocates an asset's cost over several years. Add all expenses to calculate total charges.

Net Income or Loss

Subtract total expenses from total revenues. A positive result means a company generates income at the end of the period. A negative result indicates a net loss.

Illustration

A company's controller asks a junior accountant to prepare the corporate income statement for the year. Sales, commissions earned and interest income for the year amount to $19 million, $950,000 and $50,000, respectively. The cost of goods sold amounts to $10 million. General and administrative expenses equal $5 million. The company's tax rate is 40 percent. The junior accountant notes that total revenues equal $20 million -- $19 million plus $950,000 plus $50,000 -- and total expenses amount to $15 million -- $10 million plus $5 million. As a result, corporate income before taxes equals $5 million -- $20 million minus $15 million. Tax liabilities for the year amount to $2 million -- $5 million times 40 percent -- thus generating $3 million -- $5 million minus $2 million -- in net income for the year.