Exploring the Income Statement for the FAR CPA Exam
Kyle Ashcraft, CPA · 2019 CPA Exam Scores · 95 FAR · 98 BEC · 91 REG · 90 AUD
The income statement — also called the profit and loss statement — reports a company's financial performance over a period, usually a month, quarter, or year. It's built from seven components, each flowing into the next: revenues, cost of goods sold, gross profit, operating expenses, operating income, other income and expenses, and net income.
What counts as revenue?
Revenues are the earnings a company generates from its core business activities — sales of goods in retail, or fees and commissions in services.
Example: recording a sale
- Debit Accounts Receivable $10,000
- Credit Sales Revenue $10,000
What is cost of goods sold?
Cost of goods sold (COGS) is the direct cost of producing or purchasing the goods a company sold during the period.
Example: recording COGS
- Debit COGS $4,000
- Credit Inventory $4,000
How do you calculate gross profit?
What are operating expenses?
Operating expenses are the day-to-day costs of running the business — wages, rent, utilities, and similar recurring costs.
Example: recording rent expense
- Debit Rent Expense $1,000
- Credit Cash $1,000
How do you calculate operating income?
What counts as other income and expenses?
These are non-operational items — gains or losses from selling assets, interest income, and interest expense — that fall outside the core business.
Example: recording interest income
- Debit Cash $200
- Credit Interest Income $200
How do you calculate net income?
Net income is the bottom line — profitability after every operating and non-operating item is accounted for.
Putting it all together
Using the figures from the examples above:
What disclosures accompany the income statement?
U.S. GAAP requires extensive disclosures, including:
- The nature and type of revenue
- Cost recognition methods for COGS
- The components and nature of operating and non-operating expenses
The income statement is a chain of subtractions and additions, each building on the last. Revenue minus COGS gives gross profit; gross profit minus operating expenses gives operating income; operating income plus or minus other items gives net income.
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Kyle Ashcraft, CPA scored 90 or above on every section of the CPA exam in 2019, including a 95 on FAR. He is the founder and sole instructor of Maxwell CPA Review, a complete CPA review course covering all six sections, where he creates every lecture, textbook and study outline himself.