Show me the money Income statement
The Income Statement would be an important part of the accounting world which does show you the money. This document is part of the three main financial statements, the other two being the Balance Sheet and Cash Flow Statement. The Income Statement covers a period of time just like the Cash Flow Statement and unlike the Balance Sheet which covers a specific point in time. The company's net profit or loss is reflected for the given period which is usually a month, quarter or year. All the information included in the Income Statement is a direct reflection of all the transactions that are recorded in the journals and ledgers. The information from this statement is used internally by management as well as externally by creditors and investors. The external contributors want to know if their money is going to yield a profit or if they have found a company that will put their money down the drain.
Many items are included in the Income Statement. The items are important to the structure of the document. This is the Multi-step version. This version is more complex but more useful because it separates operating and non-operating activities. The items to be included are as follows:
Revenue
o the amount that the firm or company earned for the good or service they have provided
Cost of Goods Sold
o the amount that the firm has spent for the good or service they have provided. This includes direct materials and direct labor or in other words anything that you can specifically say that it went to that sold item or trace to that item.
Gross Profit
o Calculated by subtracting Cost of Goods Sold from Revenue. This will tell the company if they are spending more on raw materials and labors then they are recovering in the sales.
Operating Expenses
o Any expense that is not directly related to the finished good. In other words, rent expenses or salaries of administrative staff. The administrative staff rarely take part in the actual building or developing of the product but are still needed to make executive decisions.
Operating Profit
o Calculated by subtracting operating expenses from gross profit. This tells the firm if when they are all said and done and everything has been taken into account except interest if the company is making a profit or taking a loss.
Interest Expenses
o Indicates any interest that has been collected by the company from loans or other sources.
Net Profit or Loss
o Tells the company exactly how well they are doing. If they are positive then they have made a profit. A negative number is going to mean the company took a loss and needs to look at ways to cut down the expenses.
A simplified example would be the following:
Critter Supply has some transactions that have occurred for the month of January. One of which that occurred on January 5,2010 being a sale amounting to $200.00 for dog food. The Cost of goods sold was $50.00 which included the cost to pay the truck to bring the product and employees putting the product out. The Gross profit is $150.00. Now let's say they have operating expenses of $25.00. The Operating profit is $125.00. They have no interest expense currently so they have made a Net Profit of $125.00.
The Single Step format is just expenses subtracted from revenues which results in the net profit or loss. There is no separation or organization of how the costs break down.
On the income statement there should be a section stating the earnings per share. Earnings per share must be reported for all items either in the statement or on the notes section, including continuing operations, discontinued operations, extraordinary items, as well as net income. This serves as an indicator of how profitable a company is. This is calculated by subtracting dividends on preferred stock from net income and dividing that by average outstanding shares. This tells you how much a shareholder would earn if the company decided to pay out all of their net earnings for the period.
For a quick summary, an income statement that is set up properly is going to make investors want to put more money into the company. It also is going to show management where a lot of their problems are. They will be able to analyze and see what areas they need to try and cut down their expenses in. If their operating expenses are high and sales are down then they know that they could possibly need to cut staff.
Show me the money Income statement
By: Lauren
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