Agriculture Reference
In-Depth Information
Income statement
The
income statement
(
Table 9.2)
summarizes revenue and expenses during a specifi c
period of time and reports the
accounting loss or profi t
that results from the deduction of
expenses from revenue. For these reasons, this fi nancial statement is most commonly known
as the income statement. Titles like the operating statement, profi t and loss statement, or
statement of earnings are also used for the income statement.
The income statement provides a primary measure of business profi tability; therefore,
it is a key fi nancial statement for operating managers. Its very format emphasizes the
basic profi t formula, and, hence, holds the key to solving many operating management
problems:
Net sales
- Cost of goods sold
Gross margin
- Operating expenses
Net operating income
Because this fi nancial record summarizes the activities of the company over a specifi c period
of time, it lists only those activities that can be expressed in terms of dollars relating to that
specifi c period of operations for the fi rm. While comparing two balance sheets can indicate
the changes in the position of the company for a particular accounting period, the income
statement details how this change took place during that same period.
The accounting process helps in distinguishing between expenses and expenditures.
An
expenditure
is incurred whenever the business acquires an asset, such as a truck,
building, or fertilizer, whether it is used immediately or years later.
Expenses
are expendi-
tures that are incurred by the business during the accounting period being reported. Expenses
directly affect owner's equity—higher expenses mean lower profi t, which, in turn, dictates a
lower addition to the fi rm's owner's equity. Whenever an asset is acquired, the business
must make arrangements to pay for it, either immediately or later. The date of cash payment
is extremely important to the fi rm's cash fl ow, but it has little to do directly with profi ts or
losses.
The income statement identifi es the dollar volume of business during a specifi c period
and then matches to it, as precisely as possible, the expenses incurred to perform these busi-
ness operations. Not all the cash expenditures (dollars spent) during an accounting period
can be attributed to business transacted during that period. For example, BF&G may pur-
chase a truck in one year but use it for several years. It would be inappropriate to charge the
entire cost of the truck (expenditure) to the business during the year in which it was pur-
chased, since the truck will last for several years. Therefore, only that part that is used during
the operating period is reported as an expense (previously referred to as depreciation). This
loss in value is reported on the balance sheet (
Table 9.
1, l and o). Similarly, BF&G could
have purchased seed (expenditure) and placed it in inventory near the end of an accounting
period without selling it until the following period. This amount of inventory should not be
charged as an expense for the period since it was not sold.
Therefore, only as an asset is used up or sold does it become an expense to the business.
That is, as any asset becomes part of the operation and is directly or indirectly sold to a cus-
tomer, it becomes an expense. As the BF&G truck is used, it wears out. For business pur-
poses, one might even say that it is being sold to customers bit by bit as this wearing-out
