First step - you need to understand each individual components of the income statement (also called a Profit & Loss Statement or P&L Statement): Sales (Revenue) The sales figure represents the amount of revenue generated by the business. It is calculated as the total of the number of units sold multiplied by the selling price per unit. The amount recorded here is the total sales, minus any product returns or sales discounts. Cost of Goods Sold This number represents the costs directly associated with making or acquiring your products. Costs include materials purchased from outside suppliers used in the manufacture of your product, as well as any internal expenses directly expended in the manufacturing process. In a service business where you, as the owner, are the only expense in supplying the service, and you do not pay yourself a salary beyond the company profits, your service expense may be zero. However, in a service business where you pay yourself a salary or have employees, the cost of their labor, including benefits, would be part of your cost of goods sold. Gross Profit Gross profit is calculated by subtracting the cost of goods sold from net sales. It does not include any operating expenses or income taxes. Operating Expenses These are the daily expenses incurred in the operation of your business. In this sample, they are divided into two categories: selling and marketing and general/administrative expenses. Sales salaries: These are the salaries plus bonuses and commissions paid to your sales staff. Collateral and promotions: Collateral fees are expenses incurred in the creation or purchase of printed sales materials used by your sales staff in marketing and selling your product. Promotion fees include any product samples and giveaways used to promote or sell your product. Advertising: These represent all costs involved in creating and placing print or multimedia advertising. Other sales costs: These include any other costs associated with selling your product. They may include travel, client meals, sales meetings, equipment rental for presentations, copying, or miscellaneous printing costs. Office salaries: These are the salaries of full- and part-time office personnel. Rent: This is the fee incurred to rent or lease office or industrial space. Utilities: These include costs for heating, air conditioning, electricity, Internet, and phone usage incurred in connection with your business. Depreciation: Depreciation is an annual expense that takes into account the loss in value of equipment used in your business. Some examples of equipment that may be subject to depreciation include computers, office furniture, automobiles, and buildings that you own. If you don’t understand depreciation, don’t worry; I will explain it more carefully in a separate section. Other overhead costs: Expense items that do not fall into any of the above categories or cannot be clearly associated with a particular product or function are considered to be other overhead costs. These types of expenses may include insurance, office supplies, or cleaning services. Total Expenses This is a tabulation of all expenses incurred in running your business, exclusive of taxes or interest expense on interest income, if any. Net Income Before Taxes This number represents the amount of income earned by a business prior to paying income taxes. This figure is arrived at by subtracting total operating expenses from gross profit. Taxes This is the amount of income taxes that you owe to the federal government and, if applicable, state and local government. Typically, a pro-forma (future forecast) income statement projects a 25% tax rate. Net Income This is the amount of money the business has earned after paying income taxes. ASSIGNMENT 1. Using MS Excel, create an income statement using the information in the table below. You should replicate the structure and content from the example below, but you will need to build the formulas required to calculate the following rows: Net Sales Revenue Total Cost of Goods Sold Gross Profit Total Marketing & Sales Expense Total General & Administrative Expenses Total Operating Expenses Net Income Before Taxes Taxes (25% of Net Income before Taxes) Net Income 2. Highlight the cells in your spreadsheet showing your answers to the following: Gross Profit Net Income Before Taxes Net Income
Reporting Cash Flows
Reporting of cash flows means a statement of cash flow which is a financial statement. A cash flow statement is prepared by gathering all the data regarding inflows and outflows of a company. The cash flow statement includes cash inflows and outflows from various activities such as operating, financing, and investment. Reporting this statement is important because it is the main financial statement of the company.
Balance Sheet
A balance sheet is an integral part of the set of financial statements of an organization that reports the assets, liabilities, equity (shareholding) capital, other short and long-term debts, along with other related items. A balance sheet is one of the most critical measures of the financial performance and position of the company, and as the name suggests, the statement must balance the assets against the liabilities and equity. The assets are what the company owns, and the liabilities represent what the company owes. Equity represents the amount invested in the business, either by the promoters of the company or by external shareholders. The total assets must match total liabilities plus equity.
Financial Statements
Financial statements are written records of an organization which provide a true and real picture of business activities. It shows the financial position and the operating performance of the company. It is prepared at the end of every financial cycle. It includes three main components that are balance sheet, income statement and cash flow statement.
Owner's Capital
Before we begin to understand what Owner’s capital is and what Equity financing is to an organization, it is important to understand some basic accounting terminologies. A double-entry bookkeeping system Normal account balances are those which are expected to have either a debit balance or a credit balance, depending on the nature of the account. An asset account will have a debit balance as normal balance because an asset is a debit account. Similarly, a liability account will have the normal balance as a credit balance because it is amount owed, representing a credit account. Equity is also said to have a credit balance as its normal balance. However, sometimes the normal balances may be reversed, often due to incorrect journal or posting entries or other accounting/ clerical errors.
First step - you need to understand each individual components of the income statement (also called a Profit & Loss Statement or P&L Statement):
Sales (Revenue)
The sales figure represents the amount of revenue generated by the business. It is calculated as the total of the number of units sold multiplied by the selling price per unit. The amount recorded here is the total sales, minus any product returns or sales discounts.
Cost of Goods Sold
This number represents the costs directly associated with making or acquiring your products. Costs include materials purchased from outside suppliers used in the manufacture of your product, as well as any internal expenses directly expended in the manufacturing process.
In a service business where you, as the owner, are the only expense in supplying the service, and you do not pay yourself a salary beyond the company profits, your service expense may be zero. However, in a service business where you pay yourself a salary or have employees, the cost of their labor, including benefits, would be part of your cost of goods sold.
Gross Profit
Gross profit is calculated by subtracting the cost of goods sold from net sales. It does not include any operating expenses or income taxes.
Operating Expenses
These are the daily expenses incurred in the operation of your business. In this sample, they are divided into two categories: selling and marketing and general/administrative expenses.
- Sales salaries: These are the salaries plus bonuses and commissions paid to your sales staff.
- Collateral and promotions: Collateral fees are expenses incurred in the creation or purchase of printed sales materials used by your sales staff in marketing and selling your product. Promotion fees include any product samples and giveaways used to promote or sell your product.
- Advertising: These represent all costs involved in creating and placing print or multimedia advertising.
- Other sales costs: These include any other costs associated with selling your product. They may include travel, client meals, sales meetings, equipment rental for presentations, copying, or miscellaneous printing costs.
- Office salaries: These are the salaries of full- and part-time office personnel.
- Rent: This is the fee incurred to rent or lease office or industrial space.
- Utilities: These include costs for heating, air conditioning, electricity, Internet, and phone usage incurred in connection with your business.
Depreciation : Depreciation is an annual expense that takes into account the loss in value of equipment used in your business. Some examples of equipment that may be subject to depreciation include computers, office furniture, automobiles, and buildings that you own. If you don’t understand depreciation, don’t worry; I will explain it more carefully in a separate section.- Other overhead costs: Expense items that do not fall into any of the above categories or cannot be clearly associated with a particular product or function are considered to be other overhead costs. These types of expenses may include insurance, office supplies, or cleaning services.
Total Expenses
This is a tabulation of all expenses incurred in running your business, exclusive of taxes or interest expense on interest income, if any.
Net Income Before Taxes
This number represents the amount of income earned by a business prior to paying income taxes. This figure is arrived at by subtracting total operating expenses from gross profit.
Taxes
This is the amount of income taxes that you owe to the federal government and, if applicable, state and local government. Typically, a pro-forma (future
Net Income
This is the amount of money the business has earned after paying income taxes.
ASSIGNMENT
1. Using MS Excel, create an income statement using the information in the table below. You should replicate the structure and content from the example below, but you will need to build the formulas required to calculate the following rows:
- Net Sales Revenue
- Total Cost of Goods Sold
- Gross Profit
- Total Marketing & Sales Expense
- Total General & Administrative Expenses
- Total Operating Expenses
- Net Income Before Taxes
- Taxes (25% of Net Income before Taxes)
- Net Income
2. Highlight the cells in your spreadsheet showing your answers to the following:
Gross Profit
Net Income Before Taxes
Net Income
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