## Sections of an Income Statement and Examples

SIX (6) SECTIONS OF THE INCOME STATEMENT:

Heading: ( first section of the income statement)

The heading outlines the name of the company, the type of statement that follows (in this case, the income statement) and the time frame of the statement. Here is the heading of the company TRY OUR BIKES.

TRY OUR BIKES
Income Statement
For the Period Ending August 31, 200X

The first two lines of the heading are self explanatory. The third line or what we call the time frame line requires further discussion. The time frame is the most important part of the heading, since it tells readers of the income statement the final date at which all revenues and expenses have been calculated. Would the Net Income change if we were to change the time frame? The answer is YES!!! To explain this concept lets create an income statement for TRY OUR BIKES for the month of May only.

To complete this task you would be required to know all the revenues and all operating expenses generated from May 1 to May 31, 200X. Lets assume, during May, 200 customers rented bicycles paying \$20.00 each, resulting in a bicycle rental revenue of \$4,000 (200 customers x \$20). In addition, 100 of the 200 customers rented safety equipment at \$10.00 each, resulting in a safety equipment rental revenue of \$1,000 (100 customers x \$10.00). Also, let say operating expenses from May 1 to May 31 included the following; \$1,200 for newspaper advertising, \$500 for developing brochures and pamphlets, \$2,225 rent, \$400 for telephone and other utility expenses, \$400 in office supplies (all of which were consumed) \$75 interest on a loan you received to open the business, and \$150 for company registration. What is the Net Income or Net Loss of TRY OUR BIKES for the period between May 1 and May 31, 200X . Assume an income tax rate of 30%

 TRY OUR BIKESIncome StatementFor Period ending May 31, 200X REVENUE: Bicycle rental revenue \$4,000 Safety equipment rental revenue \$1,000 TOTAL REVENUE \$5,000 OPERATING EXPENSES: Marketing (Selling) Expenses: Newspaper advertising \$ 1,200 Brochures & Pamphlets \$ 500 Total Marketing (selling) Expenses \$ 1,700 Administrative Expenses: Rent \$ 2,225 Telephone & Utilities \$ 400 Office supplies expense \$ 400 Interest \$ 75 Company Registration \$ 150 Total Administrative Expenses \$ 3,150 TOTAL OPERATING EXPENSE \$4,850 Earnings Before Taxes \$ 250 Less: Income Taxes (30% tax rate x \$250) \$ 75 NET INCOME (after taxes) \$ 175

The Net Income or bottom line for TRY OUR BIKES for the month of May is \$175 (IE May 1 to May 31).

As you can see, the time frame (period) is very important. The net income for TRY OUR BIKES is \$7,000 from May 1 through to August 31 and the net income for May alone is \$175. Remember that May represents only one month of the business's operation while May through August represents four months. Therefore, we can say that in three months, from June through August, the company earned a net income of \$6,825 (\$7,000 - \$175 = \$6,825). The authors can not stress enough the importance of timing as it relates to business and finance.

Revenues ( second section of the income statement)
Revenues are inflows of cash and promises of cash (accounts receivable) for goods or services sold to customers. In the example, the TRY OUR BIKE company generates revenue or sales by renting bicycles and safety equipment. Below illustrates the revenue section of the company's Income Statement for the period ending August 31, 200X.

 REVENUE: Bicycle rental revenue \$20,000 Safety equipment rental revenue \$ 5,000 TOTAL REVENUE \$25,000

As you can see, the two products being sold have been separated into their own account. Moreover, all sales from bicycle rentals and all sales from safety equipment rentals are calculated separately. This is important because it shows the company which products are generating more revenue. In addition, companies selling many different products, for example, can decide which products are more profitable than others. If one or more of these products are generating insufficient revenues, the company may decide to stop selling and promoting them. For instance, TRY OUR BIKES generated \$5,000 in revenue from safety equipment rentals during May through August of 200X. If this revenue is insufficient relative to the cost of purchasing the safety equipment, the company may elect to discontinue the sale (rental) of it.

An important income statement principal you need to understand is known as the revenue reconciliation principal. In the above example, we assumed all customers paid cash for rentals. Many businesses, however, allow their customers the option of buying products or services on credit. If TRY OUR BIKE company granted credit to its customers would the Revenue amount (in dollars) change? The answer is NO!!! The revenue amount in dollars at the end of August would remain at \$25,000. In other words, if a customers buys a product or service from a business, the business MUST record the transaction as a revenue or sale immediately. Simply stated; ALL SALES MADE TO CUSTOMERS WHETHER THE CUSTOMER PAYS CASH OR PURCHASES THE ITEM/s ON CREDIT, MUST BE RECORDED AS A SALE OR REVENUE IMMEDIATELY. This rule is very important for you to understand, since you will apply it when developing your forecasted financial income statement.

Operating Expenses ( third section of the income statement)
Operating Expenses are goods or services used or consumed in operating your business. Some examples of operating expenses include advertising expense, office supplies expense, telephone expense, insurance expense, rent expense, accounting fees expense, legal fees, depreciation expense, wage expense, utilities expense, bank charges expense, interest expense, and so on.

Operating Expenses consist of two categories; Marketing (selling) Expenses and Administrative Expenses. Marketing Expenses are expenses that directly relate to the selling of your product or service. Marketing expenses might include; advertising expense, sales force salaries, sales displays expense, brochure and pamphlet development expense, sales promotion expense, and so on. Administrative Expenses are expenses that do not directly relate to the selling of your product or service; however they are necessary in operating the business. Administrative expenses may include; offices salaries expense, office supplies expense, office rent expense, insurance expense, utilities expense, shipping expense, delivery expense, maintenance expense, telephone expense, company registration expense, bank service charges expense, depreciation expense and so on.

 OPERATING EXPENSES: Marketing(selling) Expenses: Newspaper Adverting Expense \$ 3,500 Brochures & Pamphlets Expense \$ 500 Total Marketing Expenses \$ 4,000 Administrative Expenses: Rent Expense \$ 8,250 Telephone & Utilities Expense \$ 1,300 Office supplies Expense \$ 1,000 Interest Expense \$ 300 Company Registration \$ 150 Total Administrative Expenses \$11,000 TOTAL OPERATING EXPENSES \$15,000