What's on Income Statement?

Your income statement shows you several "layers" of information. You may have two or more income statements: a summary statement for the external users and a more detailed, longer version for internal management purposes. On the one hand, as a manager, you most likely want to see your profit product-by-product, to know which of your lines are really making you money. An external income statement, on the other hand, will most likely show revenue as a single line item, perhaps with a schedule attached to the income statement showing revenue from each source, but rarely the profit each source generates.

Earlier, I described the various items you will find on the income statement. Now it's time to group them.

The first grouping on your income statement gives you the results from ongoing operations.

Ongoing operations means the regular, day-to-day business that your company does. If no events have occurred outside this category, your income statement ends here.

However, there are myriad financial events that, although they happened and therefore must be recorded in your books, nonetheless are unusual and aren't expected to happen again. These are called extraordinary items, and most accounting rules require that these items be shown separately on the income statement.

The reason for this becomes clear if you think about it from an investor's perspective. For example, if you were trying to decide whether or not to invest money in a corporation that is showing a net income of $775,000, you would want to know what that includes. If half of it resulted from a gain on sale of most of that company's equipment, you would then know two things. First, there is $387,500 of net income that will never happen again. Second, the company sold most of its equipment, so how is it going to produce any income in the future? This is why accounting rules in most countries require that these extraordinary gains and losses be shown separately on the income statement. Doing so highlights unusual financial events in a company's books.

Below are some examples of extraordinary events that may need to be separated out on your income statement. (Note: Different countries have different rules regarding which items must be broken out like this and which are simply a part of ongoing operations. Check with your accountant if you have any questions.)

Proceeds or payments from lawsuits: If your company has to payout money as a result of a lawsuit or receives a settlement of claim, obviously (you hope!) this type of expense or revenue would not happen again.

Change in your accounting methods: Remember earlier when we talked about the fact that there are acceptable alternatives in choosing accounting methods? Changing from one method to another can have a large impact on your company's current year revenue as a result of "catching up" with the new method. This is a one-time occurrence that should be shown separately.

Business restructuring: The format of your business could change dramatically. If you abandon a segment of your business or layoff many of your employees, financial statement readers will need to know that these expenses will not recur regularly. The expenses of abandoning a segment of your business may include the loss on sale of equipment or extra staff wages for the transfer of assets. Expenses of laying off employees may include severance or early retirement packages, or the unusually large pay­out of vacation pay.

Asset write-downs: These could come from several sources. Inventory may be written down to its net recoverable value or written off completely if it has no value. Loans that the company has made to others might go bad and require writing off. Equipment might be lost in a factory fire. All these things would necessitate an adjustment to the income statement and would be shown as extraordinary items.

Each extraordinary item must be shown separately on the income statement after the net income from continuing operations line. Each extraordinary item line is actually a summary number from a mini-income statement. For example, obtaining a legal settlement of claim might involve the following income and expense items:

 

Proceeds received from settlement	$74,000
Less: legal fees paid to lawyer	(32,412)
Less: court costs	(1,692)
Less: registered mail costs	(157)
Net proceeds of settlement before taxes	39,739
Income tax expense on settlement	(9,934)
Net proceeds of settlement	$29,805

 

Note that this mini-income statement would show on the income statement of the company as follows:

 

Net proceeds of settlement net of taxes                                29,805

 

Breaking out the income and expenses of extraordinary items allows you to look at each individual item and understand all the income or expense items that are connected to that event.