Income statement
Stickney / Weil: Financial Accounting Chapter 3 Income Statement – Results of operating activities 1. Income Statement in general Profit margin percentage: Net income / revenues = profitability of a firm. Net income (earnings) = Revenues – Expenses Revenues = net assets (assets – liabilities) that flow into a firm when it sells goods/renders services = SERVICES RENDERED Expenses = net assets that a firm consumes generating the revenues = EFFORTS REQUIRED 2. The Accounting Period Convention Income generation occurs continually (most firms do not work only specific projects with definite start and end dates) Accounting period: Time elapsing between balance sheet dates Calendar Year / Natural Business Year (ends when stocks are at their lowest level) / Fiscal Period Convention: Accounting periods of uniform lengths Facilitates comparisons and analyses Interim periods: to show development / progress during the year 3. Accounting methods for Measuring Performance 3. 1. Cash Basis of Accounting (cash flow) Revenues are only recognized when cash is received and expenses when cash is paid. Weaknesses of this approach: a) Inadequately matches inflows and outflows Because cash flow is the basis, inflows and outflows of cash that belong to other periods, are considered in the accounting period. b) Unnecessarily delays Recognition of Revenues c) Provides Opportunities to distort Measurement of Operating Performance Manipulation by timing of cash expenditures. For example, delay cash payments at the end of an accounting period.