Chapter 2
The Income Statement
THE INCOME STATEMENT DESCRIBES THE performance of the company over a period of time, usually a month or a year. Often called a statement of operations or a profit and loss statement (P & L), this document measures the company’s achievement (revenue) and also the resources (expenses) that were expended in order to produce that achievement. The income statement is summarized as follows:
Revenue – Expenses = Profit
The difference between revenues achieved and expenses incurred is called profit or net income.
The following paragraphs describe the details of the income statement. As a reference, we have provided a five-year history of the Metropolitan Manufacturing Company in Exhibit 2-1. This is part of the same set of financials as the balance sheet in Chapter 1. The numbers refer to the line numbers on the income statement.
24. Revenue, $4,160,000
This is the dollar amount of products and services that the company provided to its customers during the year. This is often called sales; in Great Britain, it is called turnover or income. A sale is achieved when the customer takes ownership of and/or responsibility for the products.
Exhibit 2-1. Metropolitan Manufacturing Company, Inc.
Statements of Profit and Loss for the Years Ending December 31, 2002, to December 31, 1998 ($000)
2002 2001 2000 1999 1998
24. Revenue $4,160 $3,900 $3,800 $3,700 $3,400
25. Cost of Goods Sold 2,759 2,593 2,500 2,420 2,200
26. Gross Margin $1,401 $1,307 $1,300 $1,280 $1,200
34% 34% 34% 35% 35%
27. General and
Administrative Expenses 1,033 877 1,025 950 1,000
27a. EBITDA 368 430 275 350 200
28. Depreciation 56 50 50 50 45
29. Net Income
Before Tax $ 312 $ 380 $ 225 $ 280 $ 155
30. Federal Income
Tax 156 190 112 140 78
31. Net Income $ 156 $ 190 $ 113 $ 140 $ 77
32. Cash Dividends 46 46 73 95 40
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33. Change in
Retained Earnings +$ 110 +$ 144 +$ 40 +$ 45 +$ 37
Achieving revenue is quite distinct from “making a sale.” You might use the latter phrase when you and the customer agree to terms. You might say that you have made the sale when you receive the purchase order. However, revenue is not recorded until the customer has received and approved of the products or services purchased.
Revenue is the value of products or services that are delivered to a satisfied customer. The customer either pays cash or promises to pay in the future; in the latter case, the amount is recorded as accounts receivable.
Be clear that earning revenue is not the same as receiving cash for products and services. Cash can be received prior to the recording of revenue. For example, a customer may make a down payment or deposit or may pay in advance for a magazine subscription. More commonly, however, businesses receive cash after the revenue is earned, resulting in accounts receivable. One type of business in which the receipt of cash and the recording of revenue might occur at the same time is the checkout counter at a supermarket.
The amount of revenue achieved by Metropolitan Manufacturing Company is $4,160,000. This is after reductions for price discounts and allowances for possible returns and warranties.
For example:
Gross Amount at List Price $4,310,881
– Price Discounts – 86,218 (2.0%)
– Allowances for Returns and Warranties – 64,663 (1.5%)
– – – – – – –
= Revenue $4,160,000
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