Business Income Statement

Income Statement Income statements range from the veiy simple presentation shown in Table 9-16 to the more informative and more complex presentation shown in Table 9-20. The income statement shows the revenue and the corresponding expenses that were incurred to earn that revenue over a period of time. It is the most obvious measure of the efficiency of a business. Although pubhshed income statements are normally for I-year periods, many companies use monthly income statements for internal purposes. 

Income statements are veiy useful tools to assist management in controlling a business and planning for the future. Since management needs to follow the trends of the normal expenses, extraordinaiy expenses such as those incurred as a result of a major fire or flood should be shown separately. 

One of the most important items in an income statement is depreciation expense. Although depreciation should not be thought of as a means to build up a fund to replace plant, it nevertheless does enable money to be retained in the business by reducing the profit available for distribution to stockholders. It is of course a duty of both accountants and management to see that sufficient money is retained in the business to replace assets and to invest such money in other processes or outside investment. 

The Duns Financial Records Plus (DFR) database provides a balance sheet, income statement, and fourteen of the more widely used business ratios for measuring solvency, efficiency, and profitability. DFR also provides industiy norms and percentages that can be used to compare a toller s financial position to that of their... 

Cash flow and income statements identify the flow of funds through a business... 

It also shows the net income for year 1. It is important to understand that the terms net income and earnings are used interchangeably in financial reports. You will note that the net income for year 1 is 300,000. The balance sheet (Table 15-2) shows retained earnings of 200,000. This is the portion of the net income that the owners have reinvested in the business. Where did the rest ( 100,000) of the net income go It was redistributed among owners as dividends (as depicted in Table 15-4). The connection between the net income value from the income statement and retained earnings from the balance sheet is an example of how these two reports are linked. In this particular example, the details of this linkage can be examined by the statement of retained earnings (Table 15-4). 

Statements showing the financial condition of the business concern are prepared periodically from the ledger accounts. These statements are presented in the form of balance sheets and income statements. The balance sheet shows the financial condition of the business at a particular time, while the income statement is a record of the financial gain or loss of the organization over a given period of time. 

The most popular statement is the income statement, also referred to as the profit and loss statement. This statement reflects the results of all business transactions over a period of time and is a summary of all the firm s earned revenue, i.e., income from sales and services less all expenses incurred, i.e., costs associated with the earning process. The income statement usually covers a specific period of time selected by the firm, generally called a fiscal period. The fiscal period basically describes a business year, e.g., beginning on May 1, 2002, and ending on April 30, 2003. Many firms use a calendar year extending from January 1 to December 31 of the same year as their fiscal year. 

The income statement gives a good insight into the overall profitability and margins of a business. It has to be read carefully though, as several items listed are noncash charges such as depreciation that do not affect the cash flow of the business. Corrections for these items are made in the cash flow statement. 

The income statement establishes the viability of the product in business terms. It is reverse because one starts with the required profit from the product. This is a foundation principle of discovery-driven planning. It requires that product strategists have such a goal in mind as they authorize products for development. Planners, using the profit objective, work backward to the required costs and revenues. In doing this, they will arrive at supply chain cost limits for manufacturing, materials, and distribution. 

Business basics, such as legal forms of ownership, profit, income statements and balance sheets, decision or engineering economics, and marketing... 

The income statement is another important type of business financial statement. As does the balance sheet, the income statement also has different names in that it is sometimes referred to as the profit and loss statement, statement of earnings, statement... 

As is the case with the balance sheet, two example income statements are presented—the first applies to personal income and expenses and the second applies to a business. Later in this chapter, a second business income statement is used to explain the importance of the income statement for a professional services business. 

A personal income statement like that shown in Table 10.3 could be used in a postmortem mode to review income and expenses during the past year. In addition, a personal income statement could also be used in a prospective mode to plan income and its use in the near future. Retrospective and prospective uses of income statements are routine in the business environment. 

Table 10.4 follows the same general format as the example of personal income statement but applies to a hypothetical construction company. The hypothetical business for which the income statement was developed is for the same business in the calendar year for which Table 10.2, the balance sheet, was developed. One indication of the relationship between the balance sheet and the income statement is retained earnings of 252,755.21 in Table 10.2 and the identical retained earnings balance at the end of the year in Table 10.4. However, there are a few obvious connections between the construction company s balance sheet (Table 10.2) and its income statement (Table 10.4).

There may be some exceptions to the general statement that both a balance sheet and income statement are desired. For example, a modest sole proprietorship consulting business will need an income statement. However, it may not require a balance sheet because it operates on a cash basis with no significant liabilities and has little property or other assets. 

Less overhead While projects were underway, many and various expenses were being incurred within the firm which were not directly billed to the clients. Overhead = S -l- P where F is the sum of salaries and hourly pay not billable to client such as vacation, illness, holidays, bonuses, office staff, and business development. Recall that S is non-salary costs not billed to client and that P is total payroll. Then P - P = payroll paid by project income. The overhead ratio is O = (overhead)/(direct labor cost) = (S + F)/(P - F). The overhead ratio, which is usually greater than 1.0, is burden on direct labor—direct labor has to be marked up to recoup overhead and to generate profit. For the hypothetical income statement shown in Table 10.7,0=1.5. Overhead is subtracted from gross income. 

Multiplier, a common term in the consulting business, is one measure of a firm s efficiency. Refer again to Table 10.7, which is a hypothetical year-to-date income statement for a consulting engineering firm. The multiplier (M), a dimensionless parameter, is defined as net revenues divided by the direct cost of labor used to produce the revenues. In other words, the hours of labor that cost the firm 400,000 must generate total net revenues of 1,200,000 so that M = 3.0. Therefore, the multiplier is a factor that the salary chargeable to projects must be marked up to cover the raw salary itself, non-reimbursables, overhead, taxes, and profit. 

THE INCOME STATEMENT AS PART OF THE BUSINESS PLAN FOR A CONSULTING FIRM... 

The preceding discussion of business income statements emphasizes their use to document and analyze what happened over the last year or recent years in a consulting... 

PROJECTED INCOME STATEMENT FOR FIRST YEAR OF A NEW CONSULTING BUSINESS The purpose of this exercise is to help you, and others if carried out as a team effort, understand and see the value of income statements prepared in the prospective mode. Successful completion of this exercise will probably require iteration with Exercise 10.3. Suggested tasks are ... 

A. Review the scenario described in Chapter 10, Exercise 10.2, Task A. Exercise 11.6 builds on that income statement exercise and the Chapter 10 finance exercise (Exercise 10.3) as part of the overall effort to develop a business plan for your new consulting business. The business plan can be completed by preparing the marketing element as an exercise at the end of Chapter 14. 

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