1.2.1 Income Statement and Statement of Retained Earnings

The income statement is also called the statement of profit and loss.

• It measures a company’s operating performance for a specific period of time such as a month, a quarter, or a year.

• On the income statement, we subtract expenses from revenues to arrive at net earnings (net income or profit).

• Common year-ends by industries:

  • Most companies: Dec 31
  • Canada’s big banks: Oct 31
  • Many retailers: Jan 31

Revenues and Expenses

Let’s first examine the income statement heading, and then the income statement elements. Below is an Excel spreadsheet that requires you to sign in to Office 365. Office 365 will be used throughout this course to display tables and complete concept checks. 

If you cannot see the Excel spreadsheet below, please follow the instructions for Viewing embedded content in Chrome.

Income statements provide financial information for a period in time. For example, as shown above, it is “for the year ended December 31, 20XX.” In comparison, the balance sheet reflects the information for a point in time, “As at December 31, 20XX.”

The income statement has two main elements:

1. Total revenue consists of:

   1. Revenue: earned by a company in the course of its ordinary, day-to-day business activities such as the sale of a company’s primary goods and services.
   2. Gains: earned from peripheral business activities.

2. Total expenses consists of:

   1. Expenses: incurred in the course of ordinary business activities.
   2. Losses: incurred in the course of peripheral activities.

Revenues minus expenses are reported as net income

• If revenues > expenses  → net income, also known as net profit.

• If revenues < expenses →  net loss.

Case Examples of Total Revenue and Total Expenses

Apple Inc.’s ordinary revenues come from retail sales of products and services; peripheral revenues may include sales from land owned by Apple Inc.

Apple Inc.’s ordinary expenses include the cost of manufacturing the iPhone, laptops, iWatch, and other Apple products.

Typical Account Titles

What Are Retained Earnings?

• Put simply, retained earnings are the accumulated net income/losses since the company’s inception, less any dividends declared to shareholders. The statement of retained earnings reports the changes in retained earnings during the same period covered by the income statement. 

Positive Balance v. Negative Balance

• When historical income is greater than expenses and dividends, the result will be a positive balance in retained earnings.

• When historical expenses and dividends are greater than income, the result will be a negative balance in retained earnings called deficit.

Review the statement of retained earning and note the following elements:

1. Opens with beginning retained earnings balance (Dec 31, 2018 above)

2. Adds net income (or subtracts net loss)

   1. Flows from the income statement
3. Subtracts dividends

4. Reports ending retained earnings balance (Dec 31, 2019 above)