U.S. The United States of America (U.S.A. or USA), commonly known as the United States (U.S. or US) or America, is a country primarily located in North America. It consists of 50 states, a federal district, five major unincorporated territori ...

business and financial

accounting Accounting, also known as accountancy, is the measurement, processing, and communication of financial and non financial information about economic entities such as businesses and corporations. Accounting, which has been called the "languag ...

, income is generally defined by Generally Accepted Accounting Principles (GAAP) and the

Financial Accounting Standards Board The Financial Accounting Standards Board (FASB) is a private standard-setting body whose primary purpose is to establish and improve Generally Accepted Accounting Principles (GAAP) within the United States in the public's interest. The Securi ...

as:

Revenue In accounting, revenue is the total amount of income generated by the sale of goods and services related to the primary operations of the business. Commercial revenue may also be referred to as sales or as turnover. Some companies receive reven ...

s –

Expense An expense is an item requiring an outflow of money, or any form of fortune in general, to another person or group as payment for an item, service, or other category of costs. For a tenant, rent is an expense. For students or parents, tuition is a ...

s; however, many people use it as shorthand for ''net'' income, which is the amount of money that a company earns after covering all of its costs as well as taxes. Net income is also called net profit. It is calculated as follows: # The gross income or revenue is tabulated. # Where applicable, the

cost of goods sold Cost of goods sold (COGS) is the carrying value of goods sold during a particular period. Costs are associated with particular goods using one of the several formulas, including specific identification, first-in first-out (FIFO), or average cost ...

cost of operation The cost of operation is the business strategy implemented in many companies to gain a huge market. The cost of operation is the cost acquired in completing one operation. It may be a conversion of inputs into the outputs or labor costs etc. If ...

s figure is subtracted from the gross income to yield the gross profit. # All expenses other than the COGS or COO are subsequently subtracted from the gross profit to yield the profit or income – or, if a negative number, the net loss (usually written in parentheses). More commonly, this is reported on the

income statement An income statement or profit and loss accountProfessional English in Use - Finance, Cambridge University Press, p. 10 (also referred to as a ''profit and loss statement'' (P&L), ''statement of profit or loss'', ''revenue statement'', ''stateme ...

as "income (or loss) before taxes". # Taxes are then subtracted from the pre-tax income to give a final net income or net profit (or net loss) figure. Net income or net profit which is not expended to

shareholder A shareholder (in the United States often referred to as stockholder) of a corporation is an individual or legal entity (such as another corporation, a body politic, a trust or partnership) that is registered by the corporation as the legal own ...

s in the form of

dividend A dividend is a distribution of profits by a corporation to its shareholders. When a corporation earns a profit or surplus, it is able to pay a portion of the profit as a dividend to shareholders. Any amount not distributed is taken to be re-in ...

s becomes part of

retained earnings The retained earnings (also known as plowback) of a corporation is the accumulated net income of the corporation that is retained by the corporation at a particular point of time, such as at the end of the reporting period. At the end of that peri ...

. All

public companies A public company is a company whose ownership is organized via shares of stock which are intended to be freely traded on a stock exchange or in over-the-counter markets. A public (publicly traded) company can be listed on a stock exchange (list ...

are required to provide

financial statements Financial statements (or financial reports) are formal records of the financial activities and position of a business, person, or other entity. Relevant financial information is presented in a structured manner and in a form which is easy to un ...

on a quarterly basis, and the income statement of income is one of the most important of these. Some companies also provide a more rosy

financial report Financial statements (or financial reports) are formal records of the financial activities and position of a business, person, or other entity. Relevant financial information is presented in a structured manner and in a form which is easy to un ...

of their income, with ''

pro forma The term ''pro forma'' (Latin for "as a matter of form" or "for the sake of form") is most often used to describe a practice or document that is provided as a courtesy or satisfies minimum requirements, conforms to a Convention (norm), norm or ...

'' reporting, or,

EBITDA A company's earnings before interest, taxes, depreciation, and amortization (commonly abbreviated EBITDA, pronounced , , or ) is a measure of a company's profitability of the operating business only, thus before any effects of indebtedness, stat ...

reporting. ''Pro forma'' income is an estimate of how much the company would have earned without including the negative effect of exceptional "one-time events", supposedly in order to show investors how much money the company would have made under normal circumstances if these exceptional, one-time events had not occurred. Critics charge that, in most cases, the "one-time events" are normal business events, such as an acquisition of another company or a

write-off A write-off is a reduction of the recognized value of something. In accounting, this is a recognition of the reduced or zero value of an asset. In income tax statements, this is a reduction of taxable income, as a recognition of certain expenses ...

of a cancelled project or division, and that ''pro forma'' reporting is an attempt to mislead investors by painting a rosy financial picture. Besides that, when discussing results with analysts and shareholders, CEOs and CFOs have a tendency to do even more "hypothetical accounting". EBITDA stands for "earnings before

interest In finance and economics, interest is payment from a borrower or deposit-taking financial institution to a lender or depositor of an amount above repayment of the principal sum (that is, the amount borrowed), at a particular rate. It is distinct ...

taxes A tax is a compulsory financial charge or some other type of levy imposed on a taxpayer (an individual or legal entity) by a governmental organization in order to fund government spending and various public expenditures (regional, local, or ...

depreciation In accountancy, depreciation is a term that refers to two aspects of the same concept: first, the actual decrease of fair value of an asset, such as the decrease in value of factory equipment each year as it is used and wear, and second, the a ...

, and

amortization Amortization or amortisation may refer to: * The process by which loan principal decreases over the life of an amortizing loan * Amortization (accounting), the expensing of acquisition cost minus the residual value of intangible assets in a system ...

", and is also criticised for being an attempt to mislead investors.

Warren Buffett Warren Edward Buffett ( ; born August 30, 1930) is an American business magnate, investor, and philanthropist. He is currently the chairman and CEO of Berkshire Hathaway. He is one of the most successful investors in the world and has a net w ...

has criticised EBITDA reporting, famously asking, "Does management think the

tooth fairy The Tooth Fairy is a fantasy figure of early childhood in Western and Western-influenced cultures. The folklore states that when children lose one of their baby teeth, they should place it underneath their pillow or on their bedside table and ...

pays for

capital expenditures Capital expenditure or capital expense (capex or CAPEX) is the money an organization or corporate entity spends to buy, maintain, or improve its fixed assets, such as buildings, vehicles, equipment, or land. It is considered a capital expenditure ...

?" It is common for some other companies, such as

real estate investment trust A real estate investment trust (REIT) is a company that owns, and in most cases operates, income-producing real estate. REITs own many types of commercial real estate, including office and apartment buildings, warehouses, hospitals, shopping cente ...

s, to present reports using a standard called FFO, or "Funds From Operations". Like EBITDA reporting, FFO ignores

and amortization. This is widely accepted in the industry, as

real estate Real estate is property consisting of land and the buildings on it, along with its natural resources such as crops, minerals or water; immovable property of this nature; an interest vested in this (also) an item of real property, (more general ...

values tend to increase rather than decrease over time, and many data sites report

earnings per share Earnings per share (EPS) is the monetary value of earnings per outstanding share of common stock for a company. It is a key measure of corporate profitability and is commonly used to price stocks. In the United States, the Financial Accounting ...

data using FFO.

References

{{reflist United States Generally Accepted Accounting Principles Income statement