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Accounting Essay

1310 words - 6 pages

Financial Statements

A set of financial statements is a structured representation of the financial performance and financial position of a business and how its financial position changed over time. It is the ultimate output of an accounting information system and has following six components:

1. Income Statement
2. Balance Sheet
3. Statement of Cash Flows
4. Statement of Changes in Equity
5. Notes and Other Disclosures

Financial statements are better understood in context of all other components of the financial statements. For example a balance sheet will communicate more information if we have the related income statement and the statement of cash flows too.

Following the ...view middle of the document...

The statement of cash flows and the statement of changes in equity tells us about how the financial position changed over the period. Disclosure notes to financial statements cover such material information which is not appropriate to be communicated on the face of the main financial statements.

Income Statement

Income statement (also referred to as (a) statement of income and expense or (b) statement of profit or loss or (c) profit and loss account) is a financial statement that summaries the results of a company’s operations for a period. It presents a picture of a company’s revenues, expenses, gains, losses, net income and earnings per share (EPS).

Together with balance sheet, statement of cash flows and statement of changes in shareholders equity, income statement forms a complete set of financial statements.

Format

A typical income statement is in report form. The header identifies the company, the statement and the period to which the statement relates, the reporting currency and the level of rounding-off. The header is followed by revenue and cost of goods sold and calculation of gross profit. Further down the statement there is detail of operating expenses, non-operating expenses, and taxes and eventually the statement presents net income differentiating between income earned from continuing operations and total net income. In case of a consolidated income statement, a distribution of net income between the equity-holders of the parent and non-controlling interest holders is also presented. The statement normally ends with a presentation of earnings per share, both basic and diluted. Important line items such as revenue, cost of sales, etc. are cross-referred to the relevant detailed schedules and notes.

Types

There are two types of income statements: single-step income statement, in which there are no sub-totals such as gross profit, operating income, earnings before taxes, etc.; and multi-step income statement, in which similar expenses are grouped together and intermediate figures such as gross profit, operating income, EBIT, etc. are calculated.

Another classification of income statement depends on whether the expenses are grouped by their nature or function. Income statement by nature classifies expenses according to their nature i.e. without allocating them to different business activities, while income statement by function classifies expenses according to the business operations that they support. For example, income statement by nature shows line items such as salaries, depreciation, rent, etc., while income statement by function allocate salaries, depreciation, rent, etc. between cost of good sold, selling expense, general and admin expenses, etc.

Example: Template

Below is a sample income statement. The first five lines make the header followed by a multi-step overview of expenses. All amounts other than EPS are in million USD.

|IS Global, Inc. ...

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