Revenues, expenses, gains, and losses

• • Revenues: The value of sales made to customers for goods and services; inflows of resources. 

  • Expenses: Outflows of resources.

  • Gains and losses: Net inflows and outflows of resources that are only peripherally related to the company’s main business (e.g., investment income for a toy manufacturer).

Formula for Income

• • Income = Revenue - expenses + gains - losses

Income from continuing operations

Income from continuing operations represents income generated by business activities that ARE LIKELY to continue into the future. 

Income from discontinued operations

Income from discontinued operations represents income generated by business activities that ARE NOT LIKELY to continue into the future.

• Example: A company that sells medical devices but also owns a business that sells parts for boats. If the company plans to sell the boat parts business, the income generated by that business is reported as income from discontinued operations until it is sold.

Three major components of income from continuing operations

• 1. Operating income: Primary revenue-generating activities (e.g., income from selling phones and computers for Apple).

  2. Non-operating income: Peripheral or incidental activities (e.g., interest expense that Apple pays on money that it borrowed).

  3. Income tax expense:  Tax owed to Internal Revenue Service (IRS) for income generated (have to pay taxes on income from both continuing and discontinued operations as well as both operating and non-operating income).

Income tax expense is reported separately, on its own line, in the income statement. If a company has discontinued operations, income tax is calculated and reported separately for continuing and discontinued operations. 

Income statement formats

• 1. Single-step: Put all the revenues and gains together; put all the expenses and losses together.

  2. Multi-step: Group income statement items so you can see subtotals of operating and non-operating income.