Explore BrainMass

Explore BrainMass

    Income Statement

    The income statement, or statement of profits and losses, presents the current period installment of a firm's income. We typically break an income statement into several parts to make it more meaningful. The first part of the income statement relates to the profits and losses the firm incurrs over the period related to ordinary business activities. This is called operating income. The first part of our operating income section typically includes sales, the cost of goods sold related to these sales and gross profit: Revenue - COGS = Gross profit. (We typically do not use the term revenue on the income statement, ie. we abbreviate sales revenue to just sales). From gross profit we subtract other operating expenses such as selling, general and administrative expenses and overhead such as rent, insurance and depreciation in order to get net operating income.

    In addition to operating income, a firm may have income or losses from other activities. This could result from items such as a gain or loss on the sale of an asset or a gain or a loss from changes in a foreign exchange rate that affects the business. After these profits and losses are included, we call this item earnings before interest and taxes (EBIT).

    After this, we typically have a seperate line for interest expense. It is important for investors to be able to look at an income statement and see how much income the business generates in relation to the amount of fixed interest expense the firm must pay. Since taxes are determined on the amount of income left after interest is paid, we calculate this next. Our final line on a typical income statement is net income.

    Today, many firms prepare a comprehensive income statement. In 1997, FASB issued FAS130 which requires that firm's either report comprehensive income on their income statement, or in a seperate statement. Other comprehensive income includes profits or losses that the firm has incurred but has not realized yet. For example, because we typically use a historical cost basis for recording the value of assets, a gain or a loss from investments in a firm's pension fund are not recognized under GAAP. However, a large loss in the amount of assets in a firm's pension fund will have a very material affect on the firm's future profitability. As a result, by including other comprehensive income we get a better picture of the firms overall profitability. Below is an example of a comprehensive income statement.

    Often several companies are owned by a common group of shareholders, or one parent company owns several subsidiaries. When this is the case, companies are required to combine, or consolidate, all of their earnings on to one income statement. When this occurs, we call this a consolidated income statement.

     

     

    Shareholders get value from their investment in a firm when they receive dividends or the price of their share goes up, called capital gains. A firm can pay out dividends only when it earns an income. Similarly, income that is reinvested rather than paid out as dividends is what contributes to the growth of the firm, leading to capital gains. As a result, the value of a firm to its investors is inherintly tied to a firm's income - most importantly, a firm's future income. That is, the ability of the firm to generate income in the future is the key driver of the fundamental value of a firm.

    Because earnings are the key driver of shareholder value, significant attention is paid by investors to the firm's income statement. Net income is the single most important item in the financial statements. The idea is that if a firm that is profitable today, we can assume that it is likely to be similarly profitable in the future. This points to two major drawbacks to the income statement. For one, many projects that a company can invest in have high initial costs, and low initial profitability - that doesn't mean it won't be profitable over the long-term. In fact, you would not want to invest in a company that only invested in projects with short-term profitability, because chances are the firm is missing some highly valuable opportunities that could make money long-term.

    Similarly, the income statement is often subject to manipulation. Officers of a company have significant lattitude in determining when and how revenues and expenses are recorded within GAAP. Similarly, officers may bend or break the rules. For example, many people see the high-tech boom, and later bust, as a result of earnings that these firms were recognizing today, but were not reasonably assured. In fact, because of the latitude that GAAP allows for reporting revenue, errors in reporting revenue are the single most common cause of a company having to file restatements with the SEC.¹

    References:

    1. Palmose and Scholz (2004).

    © BrainMass Inc. brainmass.com March 19, 2024, 3:52 am ad1c9bdddf

    BrainMass Solutions Available for Instant Download

    Computing Interest Based on Other Amounts

    Johnson Corporation has announced that its net income for the year ended June 30, 2008, is $1,000,000. The company had an EBITDA of $ 4,900,000, and its depreciation and amortization expense was equal to $1,500,000. The company's tax rate is 34 percent. What is the amount of interest expense for the Corporation? a. $1,590,749

    Gap Inc: deferred income taxes, valuation allowance:

    I need help with this please! Examine and analyze The Gaps financial statements and tax notes. Based on your analysis, create a 4 to 5 page report in Microsoft Word document that includes answers to the following questions: How is the information related to the company's deferred income taxes presented? Does the company have

    Accrual Accounting and Financial Statements

    1. Define the classified balance sheet. Why is it useful for financial statement purposes? Expand on response 2. The return on equity is a very popular financial statistic. How does the DuPont equation/formula assist with analyzing it? Expand on response 3. Define adjusting entries. Provide two examples. Textbooks

    Income Statement, Earnings per Share, Price Earnings Ratio

    1. Define the income statement. Can it be manipulated? Explain(expand on your response) 2. Define the earnings per share and price earnings ratios. How do they affect the stock price? (expand on your response 3. Define materiality. Provide an example. Reference: Introduction to Financial Accounting, 11/E, Charles T. Horn

    Impact of Discounting Future Cash Flows for Impairment

    Calculating the true impairment value of an asset involves estimating the fair value of it. As you discussed last week, estimating an accurate fair value of an asset can be particularly challenging. In many cases, companies use different techniques to determine the level of impairment of their assets, such as discounting future

    Income Statement for The Serious Reader Company

    Preparation of an Income Statement for The Serious Reader Company The first case of this course provides an opportunity to prepare a segmented variable costing (contribution margin, behavioral) income statement and analyze the information. This is a very small company and the information may seem simplistic at first glance. D

    Kim Morris purchased Print Shop, Inc. from Chris Stanley

    Kim Morris purchased Print Shop, Inc., a printing business, from Chris Stanley. Morris made a cash down payment and agreed to make annual payments equal to 40 percent of the company's net income in each of the next three years. (Such "earn-outs" are a common means of financing the purchase of a small business.) Stanley was disap

    Preparing Income Statement and GAAP

    Generally accepted accounting principles (GAAP) require organizations to prepare both an income statement and a balance sheet. Before the balance sheet can be prepared, the organization's net income must be determined. This requires the accountant to pull together data from numerous system accounts and other sources of informati

    Green Restaurant: Breakeven and target profit

    (Use the financial statements provided below to compute the percentages for all items included in the income statement sheet as a percent of revenue. Remember that total revenue is always 100 percent. Be sure to use the formula function in Microsoft Excel to show the formulas for each of the percentage you compute. After complet

    Direct and Indirect Statements of Cash Flows

    E23-3 (Preparation of Operating Activities Section—Indirect Method, Periodic Inventory) The income statement of Vince Gill Company is shown below. VINCE GILL COMPANY Income Statement For The Year Ended December 31, 2014 Sales $6,900,000 Cost of goods sold Beginning inventory

    Accounting - Evaluating an income statement

    Can someone please help me evaluate an Income statement? What does it tell you about the company? How is it regulated and provide examples? Why is it important? Who uses it and why? Please 250+ words. Thank you!

    Income Statement and Vertical Analysis of the Statement

    Worry Company sells office supplies. The following information summarizes Best's operating activities for 2014: Utilities for store $6,000 Rent for store $8,000 Sales commissions $4,500 Purchases of merchandise $54,000 Inventory on January 1, 2012 $30,000 Inventory on December 31, 2012 $20,500 Sales revenue $108,000

    Income Statement - Depreciation

    Currently Attic is charged $3,164,000 Depreciation on the Income Statement of Andrews. Andrews is planning for an increase in this depreciation. On the financial statements of Andrews will this?: - Increase Net Cash from Operations on the Cash Flow Statement. - Just impact the Balance Sheet. - Have no impact on the Net Cash

    Dividend yield

    Currently Chester is paying a dividend of $19.34 (per share). If this dividend were raised by $3.64, given its current stock price what would be the Dividend Yield? See attachment.

    Statement Owner's Equity, and Balance Sheet for sole proprietor

    On August 1, 2014, S Khan invested $90,000 in her new company, Khan Company. During August, he made $10,000 of withdrawals from the business. The amounts of the various assets, liabilities, revenues, and expenses are as follows: Accounts payable $ 9,000 Accounts receivable 26,000 Cash

    Asset Turnover Ratio

    Please help with the following problem. Please provide step by step calculations when needed. Determine the asset turnover ratio for 2004 and 2005 using the information contained in the consolidated balance sheet and income statement for the Target Corporation in Appendix A. (See the attached file for data). Would you

    For-Profit College

    Direction: 100 words Identify a for-profit college and see if you can access their annual report/financial reports. University of Phoenix is an option recommended. Can you find any financial reports? If so, what do you observe?

    Sales-related and purchase-related transactions for seller and buyer

    Sales-related and purchase-related transactions for seller and buyer The following selected transactions were completed during August between Summit Company and Beartooth Co: Aug 1 Summit Company sold merchandise on account to Beartooth Co, $48,000, terms FOB destination, 2/15, n/eom. The cost of the merchandise sold was

    Mulberry - Income statement

    The following is a listing of some of the balance sheet accounts and all of the income statement accounts for Mulberry Street Sportswear as they appear on the 12/31/11 adjusted trial balance. Accounts Payable 10,000 Accounts Receivable 11,000 Advertising Expense 12,000 Cost of Goods Sold 89,000 Delivery Expense 6,

    Analyzing and Comparing Information Income Statements

    Marriott International, Inc., and Wyndham Worldwide Corporation are two major owners and managers of lodging and resort properties in the United States. Abstracted income statement information for the two companies is as follows for a recent year: x Marriott Wyndham x (in millions) (in millions) Operating profit before oth

    Dividends Analysis, Cash Flows, and Income Statements

    I just finished working with my team and we decided to invest in dividends in Q8. (We haven't done it before as per the prof.'s advice). Using the 34% as payout takes $15,665,265 of our cash. Although we projected good figures for our net income and cash balance in Q8, I think it's too much money. Attached please find the fin

    Everyday Products Inc. - Multi Step Income Statement for 2012

    Create a multi-step income statement. After all of the transactions for the year ended December 31, 2012, had been posted [including the transactions recorded in part (1) and all adjusting entries], the data below were taken from the records of Everyday Products Inc. Dec 2012 ad exp $125,000 COGS $3,650,000 delivery exp

    Income Statement and Cash Flow Statement

    Please open the attached PDF file and then answer 2 question below using the information in the attached PDF file. Question #1: Please develop a budgeted Income Statement. Question #2: Complete a cash flow statement on a quarterly bases (assume that annual expenses are evenly dispersed on a quarterly bases) using the info

    Everyday Products Inc. multi step income statement in good form

    Create a multi-step income statement. After all of the transactions for the year ended December 31, 2012, had been posted [including the transactions recorded in part (1) and all adjusting entries], the data below were taken from the records of Everyday Products Inc. Dec 2012 ad exp $125,000 COGS $3,650,000 delivery exp

    Multi-Step Income Statement Creation - Music Warehouse

    The attached file also contains the same information as below but properly formatted. Detailed instructions for the creation of a multi-step income statement. ________________________________ Music Warehouse Adjusted Trial Balance 31-Dec-08 Debit Credit Cash $24,675 Accounts Receivable 5

    Multiple-Step Income Statement for Music Warehouse

    Prepare a multiple-step income statement for Music Warehouse. Prepare a statement of changes in stockholder's equity for Music Warehouse. Music Warehouse Adjusted Trial Balance December 31, 2008 Debit Credit Cash $24,675 Accounts Rece