6. The Income Statement

Let's talk about the income statement. The income statement is great because it is crazy simple. The income statement says you have revenue minus expenses, say revenues minus expenses equals net income. Isn't that terrifically simple? Now you may see it... Well, later on you'll see it split out into, you'll have something like a category at the top for revenue and a couple of different things there, and then you'll see expenses, and you'll have a bunch of different things there. And then you'll have over here total revenue, total expenses equals net income. But this is not different. This is still revenue minus expenses equals net income. Okay?

So the statement of net income is extremely simple. Now, again, just like in the balance sheet video, something that your teachers are going to love to ask is income statement, point or period in time? Now what they're asking is this: does an income statement represent a distinct point in time, or does it represent a period in time? So does it represent December 31, or does it represent December 31 to December 31? Does it represent this whole time?

And if you watch the balance sheet video, we decided balance sheet equals point in time. And we said that we could just memorize that, or what's better is we could try to learn why. So let's see if we can learn why. I'm not gonna tell you the answer yet. Let's see if we can learn why the income statement is either a point or a period in time.

If the income statement contains revenue and expenses, then let's go down here and think about revenue. Let's put it in terms of your life. Revenue equals money earned, and expense equals money paid. This is pretty simplistic, but this is gonna help you understand it at a fundamental level. And it becomes pretty simple when you break it down like this. So if I ask you, "How much money did you earn?" Just think about it. If your friend came up to you and said, "How much money did you earn?" What's your next question?

When? What the heck are you talking about? How much money did I earn when? Last week? Last month? Last year? Per hour? Today? And they say, "Well, how much money did you spend?"

How much money did I spend when? So if someone says, "How much money did you earn?" You can't really answer that. You can't answer that unless they say, "How much money did you earn last week? How much money did you earn last month? How much money did you earn last year?" And what do these look like?

These look like periods of time, right? So if you're preparing an income statement, it doesn't make sense to not have a period of time defined. Because if a friend says to you, "How much money did you earn?" You can't answer that question. And that's the same thing as saying, "What was your revenue?"

Well, I don't know. What was my revenue last week? I can answer that. Last month? I can answer that. Last year? I can answer that. So that leads us to believe that the income statement must be a period in time statement, because you cannot answer those questions for a point in time. It just doesn't make sense. So when you do an income statement, you're gonna see it broken down like this, revenue, expenses, net income, but at the top you're gonna see January 1 to December 31. So that's gonna say, over this whole period of time, here's my revenue, here's my... well, down here. Here's my expenses, and that's my net income for this period of time.

Now, if I was to change this to January 1 to July 1, well, then all these numbers are gonna change because we only earned half the revenue, and we only had half the expenses or something like that. So that's the thing that you need to remember when you see it on the test: is the income statement point in time or period in time? Think to yourself, what goes on the income statement? Revenue. Well, revenue goes on the income statement. Can you measure revenue at just a single point in time?

No, but you can measure it over a period of time. You can measure it from January 1 to December 31, so that means you've just arrived at your answer. It's a period in time statement.