Income statement and Presentation Format

Income statement
Also known as “statement of operations”, “statement of earnings” or profit and loss statement (P&L)”.

Revenues – expenses = net income

Presentation Format

Single step format– group revenue and expenses together respectively

Multi-step format – show subtotals such as gross gross profit and operating profit.

Sales
- Cost of goods sold (COGS)
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=Gross profit (gross margin)
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- Selling, general and administrative (SG&A)
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= Earning before interest, tax, depreciation and amortization (EBITDA )
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- Depreciation and amortization
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= Earning before interest and tax (EBIT)
(Operating income from continuing operation)
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- Other income & revenues (e.g. investment income, gain or loss from sale of assets)
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= Recurring income before tax & interest from continuing operation
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+/- Financial cost (interest expense or interest income)
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= EBT (Recurring (pre-tax) income from continuing operations)
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- Unusual items
- Infrequent items
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= Pretax earnings from continuing operations
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- Taxes
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= Income from continuing operations (net income from continuing operations)
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- Non-Recurring Items
Extraordinary items
Discontinued operations
Account changes
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= Net income

Notes:

EBIT
· independent of capital structure as no interest expenses are included.
· For non-financial firms, operating profit is the amount before financial costs and income taxes. For financial firms, interest expenses is considered as operating expenses.

Unusual or infrequent items
· Included items that are either unusual or infrequent in nature but cannot be both. Examples: an employee-separation cost, plant shutdown, impairments, write-offs, write-downs, integration expenses, etc.

Non-Recurring Items
· reported net of taxes and below the tax line, and are not included in income from continuing operations.

Income (or expense) from discontinued operations
· relate to income (or expense) generated due to the shutdown of one or more divisions or operations (plants).
· They do not inflate or deflate the company's future earning potential.
· Sometimes management decides to dispose of certain business operations but either has not yet done so or did it in the current year after it had generated income or losses. To be accounted for as a discontinued operation, the business must be physically and operationally distinct from the rest of the firm.
· Basic definitions:

• Measurement date - The firm develops a formal plan for disposal
• Phase-out period- time between measurement date and disposal date

· Past income statements must be restated, separating income or loss from discontinued operation.
· On measurement date, accrue any estimated loss during the phase-out period and estimated sales of the disposal;
· Expected gain from sales of disposal cannot be reported until after the sales is completed.

Extraordinary items
· relates to items that are both unusual and infrequent in nature. That means it is a one-time gain or loss that is not expected to occur in the future. Examples: expropriations by governments, gain/loss from early retirement of debt, and uninsured losses due to natural disasters.

Cumulative effect of accounting changes
· Relate to changes in accounting policies - Changes in inventory methods, depreciation schedules, recognition of post-retirement benefits, etc. due to changes in GAAP or management’s decision.
· Disclosure is required - nature of the change, justification, and effect on net income. Changes in inventory method and revenue recognition method are retroactive. Cumulative result of the changes net of tax is reported below the line.
· Examples:

• switch from the LIFO inventory accounting method to another method
• estimations.
• change in depreciation method for new assets or change in depreciable lives/salvage values

· In most cases, these are non cash-related expenses but could have an effect on taxes.
· In general, prior years' financial statements do not need to be restated unless it is a change in:

• Inventory accounting methods (LIFO to FIFO)
• Change to or from full-cost method (This is used in oil & gas exploration. The successful-efforts method capitalizes only the costs associated with successful activities while the full-cost method capitalizes all the costs associated with all activities.)
• Change from or to percentage-of-completion method (look at revenue- recognition methods)
• All changes just prior to a company's IPO

Prior Period Adjustments
These adjustments are related to accounting errors. These errors are typically NOT reported in the income statement but are reported in retained earnings. (These can be found in changes in retained earnings.) These errors are disclosed as footnotes explaining the nature of the error and its effect on net income.