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Preparing Income Statements

Preparing Income Statements

Author: Evan McLaughlin

In this lesson, the student will learn how to prepare an income statement.

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"Preparing Income Statements"

Source: Instrumental “Drops of H2O ( The Filtered Water Treatment )" by J.Lang (feat. Airtone),” Creative Commons,

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Hey everyone, and welcome to our video today, Preparing Income Statement. So what are today's topics? Well, today is all about the income statement. We're going to do a quick income statement review, sort of hit on some of the main touchpoints. And then we're going to cover a detailed example of a multi-step income statement, which is going to be very exciting.

So let's jump in and do our review of the income statement. Income statement review. So what is the income statement?

The income statement is a financial statement that provides information about the revenue, expenses, and net profit or loss of a business for a given time period, so a time period, it's activity-based. So the net profit or loss idea, so the income statement helps us identify a business's profitability. That's important. The income statement will typically cover one year or less of activity. And it helps us assess the health and strength of a business, which is important information for shareholders, potential investors, and banks.

Now what's the income statement formula? Well, the basic income statement formula is revenues minus expenses equals net income, where revenues are inflows from business operations and expenses are outflows or the use of assets from those operations.

So more review. There are two types of income statement formats. We had our single step and our multi-step. Single step is called single step because you take your total revenues, subtract out your total expenses to get you net income. So there's one step.

The multi-step, which we're going to look at today in our example, is a little more complex. So you'll start with something like sales, subtract out your cost of goods sold. That's your first step to give you a gross profit. From there, you'll subtract out operating expenses, step two, to get to your income from operations.

And then finally, you'll take out other expenses or you'll add other revenues. That's step three. So you take income from operations, adjust it for other revenues or expenses to get to your net income. So at the end of the day single step and multi-step get to the same place, they get to our net income. But the multi-step breaks it down further than just total revenues and total expenses.

So let's look at our income statement example, which in this case is going to be a multi-step. Before we get there, let's move to our adjusted trial balance, which is going to help us prepare that multi-step income statement. Let's look at the trial balance, adjusted trial balance on our trial balance worksheet. And then we'll jump into the example.

So let's take a look at the adjusted trial balance on our trial balance worksheet. OK. So taking a look at our trial balance worksheet, we've identified our adjusted trial balance, which is what we used to prepare financial statements. So in this case, we're working on the income statement. So we need to identify the accounts that we need to use to prepare our income statement.

So if we take our adjusted trial balance and then we look at what our income statement's going to look like, we take our sales, revenues. So all of our revenues and all of our expenses are what we're going to use for our income statement. So you'll see we have all of our revenues as well as all of our expenses.

And there's a difference. Our total debits don't equal our total credits. Well, the difference, that's our net income. So those are the accounts and we're going to use to prepare our income statement. So let's go ahead and walk through preparing a multi-step income statement using these details.

So now that we've used our trial balance worksheet to identify our income statement and what we need it to look like, let's jump into our example, income statement preparation for our multi-step income statement. So here I've captured the information from our adjusted trial balance. We have all the accounts for our adjusted trial balance.

But do we need all these accounts for the income statement? We don't. We don't need our permanent accounts. All we need are our temporary accounts, our revenues and our expenses. So you can see here we only need these items at the bottom from our adjusted trial balance, starting with sales through the end of our expenses.

So using that, let's start building our income statement. As you see here, we have our header. So we start with our company name. Then we would put "income statement."

And then it's very important that we include the information "for the period ending" blank. And in this case, it's December 31, 2012. So that helps us indicate that this is a period-based and activity-based statement.

So starting with our sales, we pull the sales out, put those on top. We subtract out our cost of goods sold to get us to our gross profit. So sales minus cost of goods sold gives us our gross profit.

And then we detail our operating expenses. So we have in this case using our adjusted trial balance, we have salaries, advertising. We have insurance, supplies, and depreciation. We have total operating expenses of $134,000.

So then we can calculate our income from operations, which is our gross profit minus our total operating expenses, to get to our income from operations. Now from there, then we look at our other revenue and expense items. So we in this case have interest revenue. And then we also have interest expense. So our total other revenue in this case is $17,500.

So then we can calculate our net income. We take our income from operations of $16,000, add our total other revenue in this case, which is $17,500, to get to our net income of $33,500. So that's what our multi-step income statement looks like. And again, from our adjusted trial balance we don't need our permanent accounts, just the temporary accounts, our revenues and our expenses.

So let's review. What did we talk about today? Well, today was all about the income statement. The income statement is a financial statement that provides information about the revenue, expenses, and net profit or loss of a business for a given time period. We looked at a comprehensive example of our multi-step income statement.

I hope everybody enjoyed this video. And I hope to see you next time.