The Income Statement
| Author | Vern Krishna |
| Pages | 238-260 |
Chapter 10: The Income Statement
A. OVERVIEW
e income statement provides a measure of an enterprise’s protabil-
ity and past performance. It is of interest to shareholders, potential
investors, creditors, employees, and government agencies, and regu-
lators, but for dierent reasons. Shareholders and investors want to
know how well the enterprise performed but, even more importantly,
how well they can expect it to perform in the future. Creditors are
concerned with the security of their loans and the ability of the enter-
prise to repay them from earnings. Employees in prot sharing plans
are interested in determining their share of the prots. e CRA is
concerned with the amount that they can collect in taxes. Regulators,
such as securities commissions, are concerned with fair disclosure of
information in lings for the benet of investors.
B. THE CONCEPT OF NET INCOME
“Income” is a measure of net gain over a period of time. Revenues
increase economic resources resulting from the ordinary activities of
an entity, such as for example, from the sale of goods, the rendering of
services or the use by others of entity resources that yield rent, interest,
Chapter 10: The Income Statement
royalties, or dividends. us, we identify the amount of the gain or
revenue and relate it to the appropriate time period when we should
recognize it. Both of these aspects of measurement involve legal, eco-
nomic, and accounting principles.
Equally important, we measure net gain by matching an entity’s
revenues against the expenses that it incurs to earn the revenues.
Expenses are decreases in economic resources, either by way of out-
ows or reductions of assets or incurrences of liabilities, resulting from
an entity’s ordinary revenue generating or service delivery activities.
As we have seen, generally accepted accounting principles
(GAAP) provides guidelines to resolve issues that arise in measuring
net income for operating results for a particular period when there
are alternative methods. Hence, the matching process is as much art
as it is science. For example, the Royal Bank of Canada’s Annual
Report contains the following statement in its MD&A statement
regarding comparison of its nancial results:
We believe that certain non-GAAP measures described below are
more reective of our ongoing operating results and provide read-
ers with a better understanding of management’s perspective on
our performance. ese measures enhance the comparability of our
nancial performance for the year ended October , with
the results from last year. Non-GAAP measures do not have a stan-
dardized meaning under GAAP and may not be comparable to similar
measures disclosed by other nancial institutions (emphasis added).
Net income essentially comprises two components, revenue and
expenses, during a period of time. e income statement matches
revenues (R) and expenses (E) to determine net income over the
given period. e investment community refers to net income as the
CPA Canada Handbook — Accounting, Chartered Professional Accountants of
Canada () [Handbook] at para ..
See Chapter for a description of the matching process and the cash and
accrual basis of accounting.
Handbook at para .
See Chapter , Accounting Principles.
Royal Bank of Canada: Annual Report 2019, online: https://annualreports.rbc.com/
ar/site-content/uploads///-RBC_AR__ENG.pdf at page .
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