The income statement is probably the widely used component of the financial statements, since it indicates to what extent the company has been profitable during its fiscal year. The title of the income statement indicates the period of time covered by the statement, which is usually the one-year period coinciding with the fiscal year of the company. There are certain standardized categories of an income statement, but not all of them are found in a particular company since they may not all be applicable to that company. The income statement always begins with the sales or revenue earned during the period. In preparing the income statement, the Chartered Accountant must ensure that the revenue is accrued according to the revenue recognition policy of the company. The next income statement caption is cost of sales, which takes into account the opening and closing inventory as well as inventory purchases and related transportation costs. The cost of sales is deducted from the sales revenue to disclose the gross profit on the income statement. This represents the direct profit realized from selling goods or services, before deducting indirect costs.

The next caption in the income statement would be selling expenses, which are detailed on the income statement and include such items as travel, advertising and automobile expenses.

Then there is a large category on the income statement called administrative expenses, which lists such expenses as salaries, telephone, office, rent, professional fees, etc. All expenses are disclosed in the amount that represents the cost incurred during the period covered by the financial statements on an accrued basis. This means that suppliers' invoices dated within the financial statement period are included even if not paid until a subsequent date.

The income statement also contains a comparative column which discloses the amounts for all of the above categories during the one-year period prior to the financial statement date. The purpose of this is so that the reader can consider and ask questions as to what has transpired since last year in all the key areas of the company. For example, if the selling expenses have increased by 35% over the prior year, the reader would want to know why this has happened and can investigate further if necessary. If not an audited income statement, the title of the income statement will disclose whether it is a Notice to Reader or Review Engagement, so that the reader will understand the level of depth that the Chartered Accountant has undertaken in the preparation of the financial statements. In each of these three cases, the reader will be able to read either the Notice to Reader report, the Review Engagement Report or the Audit Report which is a separate page within the financial statements and explains the basis of preparation of the financial statements.

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