Whose Job is it Anyway?
How is the income statement like going to the movies?
The income statement enables a business to view much more of its entire financial
picture, while other financial statements allow only previews of specific processes or
periods.
The income statement is analyzed by people interested in these two things.
The business’s financial status and the business’s profit
List the five main categories on an income statement.
Revenue
Cost of goods sold/Cost of sales
Gross profit
Operating expenses
Net income/profit
How is the income statement like a golf scorecard?
It enables the business to see its strengths and weaknesses
Which alias of the income statement represents net profit?
Earnings statement
These people use the income statement to monitor business operations.
Top executives and managers
What is gross profit and how is it calculated?
Gross profit is the total profit made before all other remaining expenses have
been deducted.
It is calculated by subtracting cost of goods sold/cost of sales from revenue.
Describe the process for analyzing an income statement.
1. Gather information that relates to the revenue, cost of goods sold/cost of sales,
and operating expenses categories on an income statement.
2. Compile and total this information.
3. Calculate gross profit and net profit.
4. Transform these numbers into ratios.
What is the calculation used to analyze the income statement?
Income minus expenses
If the outcome is positive, the business has a profit.
If the outcome is negative, the business has a loss.
Creditors can find out about these two things from income statements.
The business’s creditworthiness and the risk of extending credit to the business
Explain operating expenses and give four examples.
All expenses associated with running the business
Examples: employee wages/salaries, advertising, insurance, utilities (natural gas,
electricity, water, etc.), mortgage/rent, administrative costs, interest paid on
outstanding loans
List the questions that a business can answer by comparing categories and comparing
categories over time.
Categories:
Is the business spending too much on operating expenses?
Are sales keeping up with expenses?
Is the business earning more profit than it is spending for the cost of goods sold?
Over time:
How much did the business spend on expenses last year compared to this year?
Has profit been improving over the past five years?
Are overall costs for the business on the rise?
Name the three aliases of the income statement and give one statement about each.
Earnings statement—Even if a business is earning income, it isn’t necessarily earning a
profit. Profit is the income left over once all expenses are paid. The income statement is
the only financial statement that allows the business to look at its net profit, or “bottom
line.”
Operating statement—Information from the income statement is used by businesses to
make a variety of decisions that affect how the business will run. Examples include how
to invest money and how to cut back on expenses.
Profit-and-loss statement—the basic calculation used to analyze an income statement
is “income minus expenses.” If the outcome is positive, the business has a profit. If the
outcome is negative, the business has a loss.
Name four ways that businesses use earned profit.
Devising new ways to run a business
Designing new products
Expanding the business
Developing new methods of production
Describe what net income is and why it is important to the income statement.
Net income is final profit, or the “bottom line.” It is the money the company actually makes after all expenses have been deducted. Since the income statement determines final profit and is also used to develop other financial documents, it must be as accurate as possible. Without an accurate income statement, a company can face serious consequences.
What is a competitive analysis and why is it important? List three reasons.
A competitive analysis occurs when a business compares the figures from its income statement to that of its competitors. It is important because:
1. It shows the business’s strengths and weaknesses in relation to those of the competition.
2. It shows if the business is improving or deteriorating.
3. It lets a business know if it is generating enough sales to obtain an acceptable profit.
4. It shows if the business is effectively managing operating expenses.
5. It lets a business know if it is producing a product for more or less cost than its competition.