The income statement explained

Apple EarthThe income statement is a financial statement that measures a company’s profitability.  It is sometimes called:

  • Statement of income
  • Statement of earnings
  • Statement of operations
  • Profit and loss statement

The basic formula for the income statement is:

Revenuesexpenses = net income

Income statements are usually prepared using the accrual basis.  The largest expense on an income statement is usually cost of goods sold.  Other typical expenses include:

  • selling, general and administrative expense
  • research and development expense
  • depreciation expense
  • interest expense
  • provision for income taxes (i.e. income tax expense)

A corporation reports earnings per share at the bottom of its income statement.

Here is Apple’s most recent income statement: http://files.shareholder.com/downloads/AAPL/1666563929x0xS1193125-11-282113/320193/filing.pdf (Go to page 43.)

[Image: Apple Earth by JD Hancock, on Flickr]

About Mark P. Holtzman

Chair of Accounting Department at Seton Hall University. PhD from The University of Texas at Austin. Worked at Deloitte's New York Office. BSBA from Hofstra University.

4 Responses to “The income statement explained”

  1. Thank you for your informative blogs. After checking Apple’s 2011 Balance Sheet [corrected from Income Statement], I was curious about the tax deferred asset and found this website covering its dubious use, what are you thoughts?: http://blogs.smeal.psu.edu/grumpyoldaccountants/archives/714

    • Tony and Ed’s brilliant blog post isn’t meant to trash Apple for reporting this. Apple’s balance sheet reports deferred tax assets because that’s what the rules require the company to do.

      That said, while companies must report these, it is questionable whether or not deferred tax assets and liabilities really are assets and liabilities. Furthermore, financial accounting for deferred taxes is extremely complex and difficult to understand, and I’m not sure most people would understand what these items really say about a company.

      Thanks for the question.

  2. excuse my error in my previous post, it was the Balance Sheet stmt

Trackbacks/Pingbacks

  1. Why you need to know accounting: Tools for businesses « Accountinator - June 20, 2012

    […] you are going to do business, you need to understand what a balance sheet is. What an income statement is. How profits are calculated. What assets are. How taxes are calculated. How to manage cash […]

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