Meaning of Segmented Income Statement
For knowing segmented income statement, we have to know what is segmentation and what is segment. Segmentation is the process of dividing company into small parts. This division based on its product or service or cost allocation. Each small part of same company will be segment.
Now Segmented income statement of each segment by comparing its income expenses to know which of our segment is profitable.
Traditional Income Statement Vs Segmented Income Statement
Traditional income statement is compulsory for the knowledge of our investor. Our investors are the our shareholders and they are interested to know their earning per share (EPS). Without making traditional income statement, it is not possible. So, we calculate the net profit by comparing whole income and expenses of our business and give this latest data to our investor for their decision whether they will keep their investment in the company or sold their part.
Segmented Income Statement is totally different. It is not compulsory as per company law but company makes its for internal purposes to know which product or product line or product segment is most profitable. On this basis, it starts to focus to grow same area.
1st Example
For example, company has 3 Products and sold it in different market. Company got total profit Rs. 5000 Cr.
Now company has made 3 product segments
A
B
C
and after comparing its income expenses
Net figure has came
A product segment
Net profit/ Loss - Rs. 15000 Cr
B product segment
Net profit/ Loss + Rs. 30000 Cr
C product segment
Net profit/ Loss - Rs. 10000 Cr
Now from above 3 segmented income statement, company has released that it has to focus only B segment because it has good strength in it. So, company has taken decision to stop A and B segment which is showing net loss and invest saved money on B segment to grow it. That is great benefit which can get the company.
2nd Example
Music Teachers, Inc., is an educational association for music teachers that has 20,200 members.
The association operates from a central headquarters but has local membership chapters throughout the United States. Monthly meetings are held by the local chapters to discuss recent developments on topics of interest to music teachers. The association's magazine, Teachers' Forum, is issued monthly with features about recent developments in the field. The association publishes books and reports and also sponsors professional courses that qualify for continuing professional education credit. The association's statement of revenues and expenses for the current year is presented below.
Music Teachers, Inc.
Statement of Revenues and Expenses
For the Year Ended November 30
Revenues $3,370,300
Expenses:
Salaries 993,000
Personnel costs 248,250
Occupancy costs 231,000
Reimbursement of member costs to local chapters 520,000
Other membership services 580,000
Printing and paper 329,000
Postage and shipping 195,000
Instructors' fees 72,000
General and administrative 30,000
Total expenses 3,198,250
Excess of revenues over expenses $172,050
The board of directors of Music Teachers, Inc., has requested that a segmented income statement be prepared showing the contribution of each segment to the association.
The association has four segments:
1. Membership Division,
2. Magazine Subscriptions Division,
3. Books and Reports Division,
4. Continuing Education Division.
Mike Doyle has been assigned responsibility for preparing the segmented income statement, and he has gathered the following data:
Now, Mike got data of each segment revenue and expenses and after comparing, he found
1. Membership Division
Net Income / Net Loss - $ 100,000
2. Magazine Subscriptions Division - $ 100,000
3. Books and Reports Division + $ 472,050
4. Continuing Education Division - $ 100,000
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Total net profit or loss = + $ 172050
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Now, music teachers inc. understood that membership division, magazine subscription and continuing education division is not gaining any profit and due to some fixed expenses and variable expenses, it is suffering loss and only profitable is books and reports division. Now, it has stopped other segment and fully focus to sell books.
