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Accounting Review

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The Income Statement

+Income Statement

The primary statement of business analysis is the income statement.

The Income Statement reports a business’ performance for the period.

+Income Statement

A simple format for an income statement is:

+Income Statement

A simple format for an income statement is:

Revenues – Expenses = Net Income

+Income Statement

A simple format for an income statement is:

Revenues – Expenses = Net Income

We will look at a more complex format later.

+Income Statement

Revenues are earned for the sale of goods or services. Note that revenues occur when the sale is made. The payment may or may not have been received.

+Income Statement

Revenues are earned for the sale of goods or services. Note that revenues occur when the sale is made. The payment may or may not have been received.

Examples of revenues include sales, service revenue and interest revenue.

+Income Statement

Expenses are incurred when a business receives goods and services. Like revenues, payment may or may not have been made.

+Income Statement

Expenses are incurred when a business receives goods and services. Like revenues, payment may or may not have been made.

Examples of expenses include salaries expense, utility expense and interest expense.

+Income Statement

Most businesses require more information from their businesses than a simple income statement can provide. Therefore, they use a multi-step income statement format.

+Income Statement

Most businesses require more information from their businesses than a simple income statement can provide. Therefore, they use a multi-step income statement format.

A format for a multi-step income statement is:

+Income Statement

Sales revenue

- Cost of goods sold

Gross profit

- Operating expenses

Income from operations

+/- Non-operating items

Income before taxes

- Income taxes

Net income

+Income Statement

Cost of goods sold represents the expense a business incurred to buy or make a product for resale.

+Income Statement

Cost of goods sold represents the expense a business incurred to buy or make a product for resale.

Example - a book store buys a book for $25 and then sells it for $32. The cost of goods sold is $25.

+Income Statement

Operating expenses are the usual expenses incurred in operating a business.

+Income Statement

Operating expenses are the usual expenses incurred in operating a business.

Accounts such as salaries expense, utility expense, and depreciation expenses are all shown in this section.

+Income Statement

Non-operating items are revenue, expenses, gains and losses that do not relate to the company’s primary operations.

+Income Statement

Non-operating items are revenue, expenses, gains and losses that do not relate to the company’s primary operations.

Accounts include interest expense and gains and losses of the sale of equipment and investments.

+Income Statement

Income taxes are computed by multiplying Income before taxes by the income tax rate.

+Income Statement

Income taxes are computed by multiplying Income before taxes by the income tax rate.

Example – Income before taxes is $50,000. The income tax rate is 30%. Income taxes = $50,000 * 30% = $15,000.

+Types of Costs

Fixed Costs

Variable Costs

Semivariable Costs

+Fixed Costs

When an item of expenditure remains the same regardless of the increases or decreases in the level of activity, we refer to this as a fixed cost. For example, placing an advertisement in the Hilltop as part of a marketing campaign for the QBA course would represent a fixed cost.

+Variable Costs

Variable costs increase or decrease in proportion to increases or decreases in the level of productive activity.

The graph shows that the variable costs of providing study materials for this course change in a linear (straight line) fashion.

+Variable Costs

Semi-variable costs behave like fixed costs within a particular range or level of activity. Once that range is exceeded, then the amount spent will rise in a step-by-step fashion.

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Variable vs Fixed CostsTest It

+Food Service

Harry’s hamburger shack sells cheezburgers, pepsi’s and chips. It has a nice sit down restaurant and a teenage, lazy waitstaff.

Hamburger Patties

Manager Salary

Phone Bill

Cleaning Service

Electric Bill

Cook Salary

Chip Bag MultiPack

12-Pack of Pepsi

+Manufacturing

D’antes Canes makes stylized canes for a high-end clientele. D’ante sells his canes in a number of kiosks in malls across the country.

Wood

Salesperson Salary

Salesperson Commission

Kiosk Location Rent

Advertisements

Case of Wood Polish

Sales Bags

Trash Bags

Displays

Business Cards

+Service

Rhiannon Real Estate sells studio condos to low-middle class DC residents. It has offices in Anacostia, Trinidad, and Takoma Park.

Agent Commissions

Business Cards

House Listing Fee

Lawyer Fee (writing sales contract)

Open House Decorations

Receptionist Salary

Agent Training