The Income Statement, also called the
Profit and Loss Statement, shows how much money a
business makes or loses over a specific time period - a month, 3
months, 6 months or a year. Income statements are prepared
monthly, quarterly and annually, but never cover a period longer
than a year. When income statements are prepared, management or
its accountants extract sales and other income totals along with
totals of various expenses from internal accounting records.
Once expenses are computed, they are subtracted from income and
either a profit or loss is shown. The results on the income
statement affect the balance sheet from period to period, so it
is important to review both statements to determine the full
impact each has on the other.
Net sales is derived by adding up the total
invoices billed to customers during the period covered, less any
discounts taken by customers. Then, any sales returns accepted
from customers during the period are deducted. After deductions
are made, the remaining figure is net sales.
Gross profit is net sales less the cost of
goods sold. Cost of goods sold includes expenses required to
manufacture, purchase merchandise and service customers. The
cost of goods sold takes in material costs, labor and factory
expenses involved in producing merchandise.
Net profit after tax (or net income
after tax) is gross profit less all expenses directly
applicable to the company's operations, including income taxes.
Net profit after tax truly measures the operating success of the
company. When total expenses exceed net sales, a minus figure
results and a loss has occurred. If there is a surplus (profit),
it can be added to retained earnings or distributed to owners
and stockholders as withdrawals or dividends. When expenses
exceed net sales (when a loss occurs), it is charged against net
worth and a reduction in the equity account occurs.
Working capital represents the funds available
to finance current business operations. This figure is important
as it is used to determine how much excess cash a business has
to fund current expenses. Working capital is the difference
between current assets and current liabilities. Since a
company's sources to pay its current debt come partly from
current assets, a business with a comfortable margin should be
able to pay its bills and operate successfully. How much working
capital is enough depends on the proportion of current assets to
current liabilities rather than on the dollar amount of working
Example income statements
The Business Plan Store will prepare detailed
financial statements for your business plan that express your
vision in terms of dollars and units of time, and in a format
that is easily understandable to all people in the lending
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