Income Statement
Module 2:
Completing the Accounting Cycle
Duration:
45-60 minutes
Level:
Beginner to Diploma-Level
Lesson Objectives
➛ Understand the purpose of the Income Statement
➛ Identify revenue and expense accounts
➛ Calculate net income or net loss
➛ Prepare a simple Income Statement
➛ Explain how the Income Statement links to other financial statements
Key Vocabulary
➛ Income Statement
➛ Revenue
➛ Expense
➛ Net Income
➛ Net Loss
➛ Accounting Period
What Is an Income Statement?
The Income Statement shows how well a business performed during a specific period.
It answers the question
Did the business make a profit or a loss?
It includes
➛ Revenues
➛ Expenses
➛ Net Income or Net Loss
It does NOT show assets or liabilities.
Order of Financial Statements
➛ Income Statement
➛ Statement of Owner’s Equity
➛ Balance Sheet
Net income from the Income Statement flows into Owner’s Equity.
Basic Income Statement Format
➛ Income Statement
➛ Revenues
➛ Less | Expenses
➛ Net Income | Net Loss
Noodle Shop
Year ended
Food Sales
Beverage Sales
Total Sales
Cost of Goods Sold
Salaries
Rent
Utilities
Interest
Tax
Total Expenses
Net Income
Year ended
Food Sales
Beverage Sales
Total Sales
Cost of Goods Sold
Salaries
Rent
Utilities
Interest
Tax
Total Expenses
Net Income
Income Statement
12|31|2020
190,000
10,000
200,000
80,000
35,000
30,000
5,000
5,000
10,000
165,000
35,000
12|31|2020
190,000
10,000
200,000
80,000
35,000
30,000
5,000
5,000
10,000
165,000
35,000
Identify Income Statement Accounts
Which of the following appear on the Income Statement?
➛ Cash
➛ Service Revenue
➛ Rent Expense
➛ Accounts Payable
➛ Salaries Expense
➛ Capital
Select all that apply
Classify Revenues & Expenses
Classify each account
Account
Sales Revenue
Utilities Expense
Interest Expense
Service Revenue
Rent Expense
Sales Revenue
Utilities Expense
Interest Expense
Service Revenue
Rent Expense
Expense or Revenue
________
________
________
________
________
________
________
________
________
________
Prepare an Income Statement
The following information relates to ABC Services for December
Utilities Expense
Salaries Expense
Service Revenue
Rent Expense
Depreciation Expense
Salaries Expense
Service Revenue
Rent Expense
Depreciation Expense
1,200
5,000
15,000
3,000
800
5,000
15,000
3,000
800
Task
Prepare an Income Statement and calculate net income.
Net Income or Net Loss
Determine whether each results in net income or net loss and calculate the amount:
➧ Revenue 8,000 | Expenses 6,500
➧ Revenue 12,000 | Expenses 14,000
➧ Revenue 5,000 | Expenses 5,000
Mini Case Study
A small consulting firm prepares its financial statements at the end of the year.
Questions
➛ What is the main purpose of the Income Statement?
➛ Name two expense accounts that may appear on it.
➛ How does net income affect owner’s capital?
➛ What happens if expenses increase but revenue stays the same?
➛ Which statement is prepared immediately after the Income Statement?
Quick Quiz
➛ What does an Income Statement show?
➛ What period does an Income Statement cover?
➛ True or False | Cash is shown on the Income Statement.
➛ How is net income calculated?
➛ Give one example of an expense account.
Answers ➧ Here
Balance Sheet ➧ Here