2 Income Statement

The income statement presents a pictures of the incomes that is generated by a business for a stated period. This statement shows you what your sales were (or what they might be if you are projecting), what the goods sold cost you and what expenses are incurred. After the cost of good and all expenses are deducted from the sales, you arrive at either net income or a loss for the period. You can then compare this with different period to see the changes that have taken place in sales, cost of goods sold , and expenses.

The income statement should never be confused with the cash flow statement. Rarely does your income from a given period equal the cash that is coming in. Your sales on the income statement take into account credit sales as well as cash sales. Credit sales do not increase your cash position until they are actually collected in cash. It is therefore possible to have a healthy profit on the income statement and yet be short of cash to meet your expenses. Therefore, you should use both income statements and cash flow statements as well as the balance sheet to assess the relatively profitability of the firm, the financial condition of the firm and the overall condition of the firm at any particular time. A typical income statement along with the definitions is included in this section.

Income statement, definitions

1) GROSS SALES: This represents the gross or total sales.

2) NET SALES: Sometimes cash discounts are deducted from gross sales thus the term “Net” sales.

a) Beginning inventory (at start of period): The inventory on hand for sale at the beginning of the period.
b) Net purchases: Net purchases made during the period (Takes into account goods returned to supplier.)
c) total cost of goods Available for Sale: the inventory on hand at the beginning of the period plus purchases (a & b).
d) Less ending inventory (at end of period): this represents the inventory at the end of the period or good in stock.
e) Cost of goods Sold: above, (c & d).

4) GROSS MARGIN: Net sales less cost of goods sold.

5) OPERATING EXPENSES: the selling and administrative costs incurred. These include items such as owner’s salary employees, wages, rent, utilities, supplier, repairs and maintenance, advertising delivery expense and other expense item incurred.

6) NET OPERATING INCOME: Gross margin less operating expenses.

7) ESTIMATED INCOME TAX: Tax owing on net income generated.

8) NET INCOME AFTER INCOME TAX: The net income after all expenses and taxes.

NOTE: Inventories include: Raw Materials, Work in Process, finished goods.Next: Balance Sheet