Income Statement (IS)

The income statement (IS) is one component of the financial statements. A standard set of financial statements includes the balance sheet, income statement, statement of cash flows, and associated footnotes. These statements can be issued on a daily, monthly, quarterly, or annual basis. If accounting is the basic language of business, then financial statements are the fundamental scorecards that report organizational performance, and the income statement depicts the net result of organizational activities, using accrual accounting, over a period of time (for example, organization X’s income statement for the year ending December 12, 2008). Accrual accounting differentiates itself from cash accounting in that revenues and expenses are matched with the time period and underlying economic transaction, rather than with when cash is received or paid. The balance sheet, in contrast, is the operational snapshot of an organization’s financial situation at a particular point in time (such as organization X’s balance sheet as of December 31, 2008). The statement of cash flows depicts organizational activities over a period of time using cash basis accounting.

A typical income statement is composed of four basic components: revenues, operating expenses, other income[Page 286] and expenses, and special accounting transactions. Revenue usually includes amounts earned for patient services, other (nonpatient) services, and nonoperating gains and losses. Operating expenses are items such as salaries, fringe benefits, rent, professional fees, and depreciation incurred to earn these associated revenues. Other income and expenses could include items such as interest income and expenses and equity gains or losses. Special accounting events can be usually classified into three groupings (DEC): discontinued operations (D), extraordinary items (E), and cumulative effect of accounting changes (C). Discontinued operations include the income statement effects of operations the organization intends to discontinue or has already discontinued. Extraordinary items include the effects of transactions that are both unusual in nature and infrequent. Cumulative effect of accounting changes includes the effects of changing from a generally accepted method of accounting to another generally accepted method of accounting.

A typical income statement has these previously discussed components ordered as follows:

• 1.
  Total revenues minus total operating expenses equals income (loss) from operations
• 2.
  Income (loss) from operations plus (minus) total other income (expenses) equals net income (loss) before special accounting (DEC) items
• 3.
  Net income before special accounting (DEC) items plus (or minus) DEC items equals bottom-line net income (or loss)

Although financial statements, including the income statement, are based on a number of different assumptions, it is important for health care professionals to understand that accounting financial statements provide valuable data that are reliable, comparable, and consistent. In addition, financial statements provide timely data that enhance the ability to assess future cash flows, to assist in decision making (an information role), and to monitor debt covenants and bonus arrangements (a stewardship role).