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Certified Public Accountant

Income Statement

The income statement (or statement of earnings or statement of operations) the document that measures the success of the company’s operations a given time period. Creditors and investors use this document to measure investment value, credit standing and income achievements.

In this statement two classifications exist: revenues and expenses. The expenses are subtracted from the revenues to arrive at the net income or loss. The income statement is divided on sections as follows:

A) Operation section-shows revenue and expenses of the company’s main operations.

a) Sales and revenue section-shows the applicable facts of sales, discounts, returns and other items to arrive at net sales.

b) Cost of goods sold section-shows the cost of goods that were sold to arrive at the gross sales in detail. Such as purchase cost of goods, labor cost of goods, etc.

c) Selling expenses section-list expenses used by the company to help make sales such as advertising and marketing of goods sold.

d) Administrative or general expenses section-list other expenses such as cleaning, repairs, telephone, office expenses.

B) Non-operation section-shows other income and expenses not part of the operation of the business like dividend and interest income or expenses for investments.

C) Income taxes section-shows federal and state taxes charged against income.

D) Discontinued operations sections-shows gains or losses from selling, or stop doing a part of a business or product line

E) Extraordinary items section-shows gains or losses from unusual and not frequent occurrences such as hurricane or flood damages.

F) Cumulative effect of changes section-shows cumulative the effect on income for changes such as an accounting principle change.

Earnings per share section-shows the per share amount of net income divided weighted average of shares outstanding.

Let us “see-saw the numbers” for the income statement

Sales = Expenses + Net income

Sales - Expenses = Net income

You don’t need a college degree to plug in the numbers in the above equations in checking your investment company’s income statement. Let’s try an example:

Sales:

B line $ 50

C line 250

Total 300

Cost of goods sold and expenses

Cost of goods $ 30

Selling expense 40

Total 70

Net income 230

Sales = Expenses + Net income

300 equal 70 plus 230

Sales - Expenses = Net income

300 less 70 equal 230

The left side must equal the right side of the equation like a “see-saw” or a “balance “ thus the term balance the books or balanced income

That simple. We will use this example in the ratio analysis below.

Profit margin= net income/net sales

77 % = 230 divide 300

Note: a high percentage is preferred.

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