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The income statement measures the profitability of the firm. It describes the revenues earned and the cash and non-cash expenses incurred by the firm. It also summarizes the taxes paid by the firm, as well as any unexpected events that may take place such as an insurance payment from an insured loss.
The income statement is generally reported on a yearly basis. Like the cash flow statement, it can also report the income and expense activities of the firm on a daily, weekly or monthly basis.
The revenue section of the income statement only records revenues to the firm. Unlike the cash flow statement, it does not report items such as owner-injected capital, operating and capital equipment loans or the total amount received from the sale of business assets. It does record such items as increases in accounts receivable and the gain or loss received from the sale of business assets.
The expense sections of the income statement include those production expenses necessary to manufacture the product or provide the service, interest payments on business loans, non-cash adjustments to operating expenses and depreciation. It does not include principal payments on business loans, since the loans are not a source of revenue for the firm. The income statement differs from the cash flow statement in that expenses are recorded in the period they are incurred, rather than when they are actually paid.
Depreciation is also recorded in the expense section. This is to plan ahead for the expense of equipment that has a limited life.
The general form of the income statement is as follows:
Value of Business Production
Minus: Operating Expenses
Equals: Income from Operations
Plus: Gain (Loss) from Asset Sales
Equals: Net Business Income
Plus: Nonbusiness Revenue (Interest Income, etc.)
Equals: Income (Loss) before Taxes
Minus: Federal, State, and Local Taxes
Equals: Income before Extraordinary Items
Plus: Extraordinary Items
Equals: Net Income
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