Income Statement Preparation

Study Notes

Income Statement Preparation

Purpose: The income statement, also known as the profit and loss (P&L) statement, presents the revenues, expenses, and net income of a company over a particular period of time.

Steps to Prepare an Income Statement:

Identify and Record Revenues:
- Recognize and record all revenues earned during the period, including sales, services, and other sources of income.
Classify Revenues:
- Categorize revenues into different segments, such as operating revenues, non-operating revenues, and other revenues.
Identify and Record Expenses:
- Recognize and record all expenses incurred during the period, including cost of goods sold, operating expenses, and non-operating expenses.
Classify Expenses:
- Categorize expenses into different segments, such as cost of goods sold, selling and administrative expenses, and non-operating expenses.
Calculate Gross Profit:
- Calculate the gross profit by subtracting the cost of goods sold from revenues.
Calculate Operating Income:
- Calculate the operating income by subtracting operating expenses from gross profit.
Calculate Non-Operating Income (Expenses):
- Calculate non-operating income (expenses) by adding (subtracting) non-operating revenues and expenses.
Calculate Net Income:
- Calculate the net income by adding (subtracting) non-operating income (expenses) to (from) operating income.

Income Statement Format:

Revenues:
- Operating revenues
- Non-operating revenues
Cost of Goods Sold:
- Direct materials
- Direct labor
- Manufacturing overhead
Gross Profit:
Operating Expenses:
- Selling expenses
- Administrative expenses
Operating Income:
Non-Operating Income (Expenses):
- Interest income
- Interest expense
- Other non-operating items
Net Income:

Key Concepts:

Matching Principle: Match revenues with the expenses incurred to generate those revenues.
Materiality: Include all material items that could impact the financial decision-making process.
Consistency: Prepare the income statement consistently from one period to another.

Description

Learn the steps to prepare an income statement, including identifying and recording revenues and expenses, classifying and calculating different segments, and understanding key concepts like the matching principle, materiality, and consistency.