Income statement example

There is no rigid format for either the income statement or the balance sheet. Tables 9-16 and 9-17 show common layouts for the income statement and balance sheet respectively, but these are not the only forms. For example, vertical balance sheets, with the assets listed above the liabilities and equity, are also popular. 

Balance Sheet The balance sheet represents an accounting view of the financial status of a company on a particular date. Table 9-3 is an example of a balance sheet for a company. The date frequently used by corporations is December 31 of any given year, although some companies are now using June 30 or September 30 as the closing date. It is as if the company s operation were frozen in time on that date. The term consolidated means that all the balance sheet and income statement data include information from the parent as well as subsidiary operations. The balance sheet consists of two parts assets are the items that the company owns, and liabilities and stockholders equity are what the... 

Income Statement An income statement shows the revenue and the corresponding expenses for the year and serves as a guide for how the company may do in the future. Often income statements may show how the company performed for the last two or three years. Table 9-4 is an example of a consolidated income statement. 

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). 

To conduct a pro forma analysis, it is necessary to construct two income statements using information from the current income statement and knowledge about the pharmacy and the third-party contract being evaluated. Information from the average net profit comparison and the differential analysis also will be needed. An example of a pro forma analysis for Good Service Pharmacy is presented in Table 16-6. The... 

Pikes Peak Coffee, for example, hopes that adding a unique, healthy breakfast offering to its menu will net them an additional 1.8 MM profit annually across their 32 locations. A reverse income statement (Exhibit 11.3) shows that to meet this goal, annual revenue from the new offering (before costs) needs to be 4.6 MM. 

After compiling the estimated operational costs, update the income statement (Exhibit 11.5) to see if your initial profit projections are still on target. For our coffee shop example, total costs will likely be less than predicted on the reverse income statement, which increases the amount of projected profit. Of course, had the pro forma operation specs predicted higher costs than the initial estimate. Pikes Peak Coffee would need to either reduce costs or increase revenue projections. 

The conventions governing accounting are fairly simple, but their detailed application is complex, requiring many years of study and experience. In this chapter, we acquaint the nonfinancial professional with the basic concepts of financial reporting by using simple examples and by analyzing a typical balance sheet and income statement from a standard company report. 

Periodically, perhaps on a monthly basis but certainly yearly, the ledger sheets are closed and balanced. The ledger sheets are used as intermediate documents between journal records and balance sheets, income statements, and retained earnings statements, as well as information for various government reports. For example, a consolidated income statement can be prepared from the ledger revenue and expense accounts. From the asset and liability accounts, a company s balance sheet is prepared. Table 3.2 is the ledger obtained from the general journal. Table 3.1. 

The income statement, sometimes called the earnings statement, displays the operating activities for the year and may be an indication of how well the company is doing. A typical statement will show the numbers for the current year and at least one year previous. Frequently, an annual report will have a five- or ten-year summary near the end of the report. Table 16.7 is an example of an income statement. 

The idea of combining capital recovery into measurement of current financial performance is not new. A method called residual income has been practiced for decades. Residual income subtracts the cost of capital employed from the income statement. For example, Acme s 600,000 NC machine, described in Chapter 26, would be charged a capital cost of ownership of 90,000 (15% x 600,000) against the expected benefits. This is because Acme s hurdle rate is 15 percent. Because interest is deductible for tax purposes, many adjust the cost of capital to include the impact of taxes and asset life. 

With the financial statement, one forecasts the operational performance needed to meet financial goals. A proforma" income statement is similar to a historical income statement. However, it projects the future rather than reports on past performance. This requires defining the supply chain activities needed to support the product. The range of assumptions is broad and will vary depending on the product. Examples are production, distribution, sales force, and revenues. If the product requires a new supply chain, this tool will set financial constraints for its design. Capital costs should be translated into operating costs using the tools described in Section 27.3.2. 

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. 

The earlier observation about the variation in accuracy of line items in the balance sheet also applies to the income statement. For example, while items such as salary and interest and dividends earned can be listed to the nearest penny in a retrospective income statement, expense items such as entertainment/travel and clothing would be estimates unless unusually meticulous records were kept. Variation of accuracy within the income statement does not in any significant way detract from its usefulness as an analysis and planning tool. 

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. 

Consider an example in which an increase in utilization rate results in a decrease in the multiplier. For the base line situation, assume the income statement presented in Table 10.7. Assume further that the hypothetical firm is able to increase its utilization rate from 0.60 to 0.61, a 1.7 percent increase. Based on the Figure 10.1 relationship showing the overhead ratio as a function of expense ratio and utilization rate, the stated increase in U would reduce the overhead ratio by about 2.8 percent or the overhead by 16,800—from 600,000 to 583,200. If pre-tax profit is held at 190,000, the firm can reduce annual total revenues and, therefore, net revenues by 16,800 to 1,783,200 and 1,183,200 respectively. Therefore, the revised multiplier is equal to 1,183,200 divided by 400,000 = 2.96, which is a 1.33 percent decrease from the base line value of 3.00. In summary, a 1.7 percent increase in time utilization rate for the situation used in the example yields a 1.3 percent decrease in the multiplier with no reduction in pre-tax profit. 

Rarely, all of the information needed for analysis is made obvious on the balance sheet, income statement, or statement of cash flows. Instead, it may require closer examination to find the necessary information. The numbers reported in the financial statements may not be exactly what is needed for financial analysis and day-to-day decision making by those in supply chain and operations because of the assumptions made by a company s financial experts. Accountants have the liberty to make assumptions based on historical trends when preparing financial statements. Examples of these assumptions include the amount of accounts receivable will not be collected, or what liabilities exist, such as tax, pension, and legal liabilities. Accountants also make assumptions about how to value tangible assets, how to value brand and intangible assets, and an amount to allocate to goodwill. As a result of these assumptions, financial results can vary widely. 

As an example of dividends being paid out to preferred stockholders first, see the income statement, Table 4.3, Note 1 PepsiCo s dividends paid to preferred stockholders and redemption premium totaled 8M period ending 2013. 6,740 - 8 = 6,732. Thus, 6,732 is net income available to common stockholders. 

Although it is possible that the balance sheet inventory account may stay the same or increase from carrying additional safety stock, inventory costs have been accounted for in the cash flow forecast. Recall that inventory costs flow from the balance sheet to the income statement after the inventory has been used. In this example, the average inventory balance does not change, but since inventory has been assumed to have been used, the cost is reflected in operating expenses. 

Compare the two DuPont models the inventory account is reduced, as are the fixed assets. It is reasonable to expect that if inventory is reduced, the need for capacity is also reduced. This leads to reducing fixed assets (PP E). Although operating expenses (and COGS in other scenarios) remain the same in this example, it is not unreasonable to see this particular account decrease when inventory moves from the balance sheet to the income statement as inventory is sold. If operating expenses and COGS accounts decrease, profit margins increase. 

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