Understanding Accounting and Financial Information Introduction to Business (BUS 201) Understanding Accounting and Financial Information Chapter – 17

Income Statement An income statement is a financial statement that measures a company's financial performance over a specific accounting period. It shows the profit after deducting all the costs, expenses and taxes. It also summarizes all of the resources that have come into the firm (revenue) and all the resources that have left the firm, and the resulting net income.

Revenue It is an income, which is generated from sale of goods or services, or any other use of capital or assets, associated with the main operations of an organization before any costs or expenses are deducted. Also known as the monetary value of what a firm received for goods sold, services rendered, and other payments (e.g. rent received). Revenue and Sales are not the same thing.

Cost of Goods Sold(COGS) A measure of the cost of merchandise sold or cost of raw materials and supplies used for producing items for resale. Also known as Cost of Goods manufactured. Cost of goods sold includes the purchase price, any freight charges paid to transport goods and any costs associated with storing the goods.

Gross Profit (Gross Margin) It refers to how much a firm earned by buying (or making) and selling merchandise. When we subtract the costs of good sold from net sales, we get gross profit or gross margin. In a service firm, COGS might be absent, therefore, Gross profit is equal to net sales.

Operating Expenses Costs involved in operating a business It includes rent, utilities, supplies, insurance and salaries. Other Operating Expenses like Depreciation are much more complex. Depreciation is the systematic write-off of the cost of a tangible asset over its estimated useful life.

Net Profit or Loss After deducting all expenses, the firm’s net income before taxes can be determined. It also known as net earnings or net profit. After allocating taxes, we get the net income (or net loss) the firm incurred from revenue minus sales returns, costs, expenses, and taxes over a period of time.

How to Compile Income Statement: Revenue - Cost of Goods Sold = Gross Profit (gross margin) - Operating Expenses = Net Income (before taxes) - Taxes = Net income/loss