Trade The Journey

Trade The Journey

Income Statement

The income statement can be thought of as a statement showing the results of the companies operations. It is a well thought of statement thought to be indicative of how well the company is performing. It is the statement that shows how much the company is earning. It does a good job of doing so but as with all accounting statements, a watchful eye should be kept on the figures.

It lists the earnings and the cost of sales

Net Sales 1,500,000 2,000,000
Cost of Sales (350,000) (375,000)
Gross Income 1,150,000 1,625,000

Net Sales is the total amount paid for the product or service. The cost of sales is what went in to producing the product and can be fixed or variable cost. The cost of sales can be thought of as the labor, material, overhead and inventory it cost to directly produce the product or service. The total is the Gross Income, which is the income produced without taking into account the other expenses indirectly relating to producing the product. The margin or the amount made in sales related to the cost of goods sold, can give you an idea of how efficiently the company is in producing the product.

“The cost of sales is calculated as beginning inventory + purchases – ending inventory” (www.accountingtools.com)

Operating Expenses (SG&A) (235,000) (260,000)
Operating Income 915,000 1,365,000
Other Income (Expense) 40,000 60,000

The operating Expenses are the indirect cost involved in producing the product. The SG&A can be termed as the Sales Goods and Administrative cost which leads you with the operating income. The operating expenses also involve depreciation and amortization expenses covered here. The operating income is the income left over after covering the operating expenses. The operating margin will give you a good idea of the efficiency of the companies operations.

(Sales РOperating expenses) ÷ Sales= Operating Margin

There are a number of different reasons why the operating margin may variate amongst different people which is mainly variates because of what people decide to include in the expenses.

Other Income (Expense) 40,000 60,000
Extraordinary Gain (Loss) (15,000)
Interest Expense (50,000) (50,000)
Net Profit Before Taxes (Pretax Income) 905,000 1,360,000
Taxes (300,000) (475,000)
Net Income 605,000 885,000

Other income or expenses are incurred from operations that don’t have to do with the businesses primary operations. Extraordinary Gain are often looked to be added to the operating income in some way or form while the losses are more widely reported. The interest expense can be incurred on a number of things within the businesses operations. Bonds incur expenses through the interest the business must pay in order to borrow money or interest the credit the business has.

Alot of the items on the income statement should be referenced by the other statements which will give you a better overall idea of the businesses financial future, past and present.

The result is the Net profit before Taxes. Taxes are constantly changing which is why the pretax income is important because someone a good idea of how well the company is operating. There are number of factors that can influence the taxes such as the industry, location and the age of the business.

Once you factor in the taxes, you are left with the net income also known as the bottom line. Its how much money you actually made but is it the actual amount of money you have. NO! A portion of the sales may be in the accounts receivable section which means that its a sale but the actual cash has not arrived yet. Can you imagine trying to gauge the companies financial position without the other statements? You’d think by the income statement that the expenses have been paid in full and the sales received at the point of sale. Which is simply not true. The balance sheet presents you with an idea of where you are at in a point in time and the cash flow shows the actual amount of cash the company is actually spending and how much cash it actually has.

Hopefully this post will help you get started. Interested to know thoughts, opinions and complaints.

Leave a Comment

Your email address will not be published. Required fields are marked *