lesson 11: understanding the income statement

Novus Business and IT Training Program

Basic Finance: Understanding the Income Statement

Training Objective: To understand the purpose and structure of an Income Statement.

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Income Statement

• Also known as the Profit and Loss Statement

• Shows the results of a business over a set period of time, usually one quarter (3 months) or one year.

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Net Income

Net Income = Sales – Expenses

Or, said another way,

Net Income = Money Coming In – Money going out

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Income Statement: Sales

Star Hat Store Income Statement  Year Ending Year Ending

  31-Dec-2011 31-Dec-2010   Sales 100,000 80,000   Cost of Goods Sold - 65,000 55,000    Gross Income = 35,000 25,000   Selling General and Administrative Expenses - 15,000 15,000    Operating Income = 20,000 10,000   Other Income and Expenses - 8,000 8,000    Pre-Tax Income = 12,000 2,000   Taxes - 2,400 400    Net Income = 9,600 1,600            

20% increase from 2010 to 2011

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Income Statement: Cost of Goods Sold

Star Hat Store Income Statement  Year Ending Year Ending

  31-Dec-2011 31-Dec-2010   Sales 100,000 80,000   Cost of Goods Sold - 65,000 55,000    Gross Income = 35,000 25,000   Selling General and Administrative Expenses - 15,000 15,000    Operating Income = 20,000 10,000   Other Income and Expenses - 8,000 8,000    Pre-Tax Income = 12,000 2,000   Taxes - 2,400 400    Net Income = 9,600 1,600            

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Income Statement: Gross Income

Star Hat Store Income Statement  Year Ending Year Ending

  31-Dec-2011 31-Dec-2010   Sales 100,000 80,000   Cost of Goods Sold - 65,000 55,000    Gross Income = 35,000 25,000   Selling General and Administrative Expenses - 15,000 15,000    Operating Income = 20,000 10,000   Other Income and Expenses - 8,000 8,000    Pre-Tax Income = 12,000 2,000   Taxes - 2,400 400    Net Income = 9,600 1,600            

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Income Statement: Gross Margin

Star Hat Store Income Statement  Year Ending Year Ending

  31-Dec-2011 31-Dec-2010   Sales 100,000 80,000   Cost of Goods Sold - 65,000 55,000    Gross Income = 35,000 25,000   Selling General and Administrative Expenses - 15,000 15,000    Operating Income = 20,000 10,000   Other Income and Expenses - 8,000 8,000    Pre-Tax Income = 12,000 2,000   Taxes - 2,400 400    Net Income = 9,600 1,600            

  2011 Gross Margin     

  35,000  

  ------------= 35%  

  100,000              

  2010 Gross Margin  

  25,000  

  ------------= 31%  

  80,000           

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Income Statement: SG&A

Star Hat Store Income Statement  Year Ending Year Ending

  31-Dec-2011 31-Dec-2010   Sales 100,000 80,000   Cost of Goods Sold - 65,000 55,000    Gross Income = 35,000 25,000

 Selling General and Administrative Expenses - 15,000 15,000

   Operating Income = 20,000 10,000   Other Income and Expenses - 8,000 8,000    Pre-Tax Income = 12,000 2,000   Taxes - 2,400 400    Net Income = 9,600 1,600            

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Income Statement: Operating Income

Star Hat Store Income Statement  Year Ending Year Ending

  31-Dec-2011 31-Dec-2010   Sales 100,000 80,000   Cost of Goods Sold - 65,000 55,000    Gross Income = 35,000 25,000   Selling General and Administrative Expenses - 15,000 15,000    Operating Income = 20,000 10,000   Other Income and Expenses - 8,000 8,000    Pre-Tax Income = 12,000 2,000   Taxes - 2,400 400    Net Income = 9,600 1,600            

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Income Statement: Other Income and Expenses

Star Hat Store Income Statement  Year Ending Year Ending

  31-Dec-2011 31-Dec-2010   Sales 100,000 80,000   Cost of Goods Sold - 65,000 55,000    Gross Income = 35,000 25,000   Selling General and Administrative Expenses - 15,000 15,000    Operating Income = 20,000 10,000   Other Income and Expenses - 8,000 8,000    Pre-Tax Income = 12,000 2,000   Taxes - 2,400 400    Net Income = 9,600 1,600            

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Income Statement: Pre-Tax Income

Star Hat Store Income Statement  Year Ending Year Ending

  31-Dec-2011 31-Dec-2010   Sales 100,000 80,000   Cost of Goods Sold - 65,000 55,000    Gross Income = 35,000 25,000   Selling General and Administrative Expenses - 15,000 15,000    Operating Income = 20,000 10,000   Other Income and Expenses - 8,000 8,000    Pre-Tax Income = 12,000 2,000   Taxes - 2,400 400    Net Income = 9,600 1,600            

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Income Statement: Taxes

Star Hat Store Income Statement  Year Ending Year Ending

  31-Dec-2011 31-Dec-2010   Sales 100,000 80,000   Cost of Goods Sold - 65,000 55,000    Gross Income = 35,000 25,000   Selling General and Administrative Expenses - 15,000 15,000    Operating Income = 20,000 10,000   Other Income and Expenses - 8,000 8,000    Pre-Tax Income = 12,000 2,000   Taxes - 2,400 400    Net Income = 9,600 1,600            

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Income Statement: Net Income

Star Hat Store Income Statement  Year Ending Year Ending

  31-Dec-2011 31-Dec-2010   Sales 100,000 80,000   Cost of Goods Sold - 65,000 55,000    Gross Income = 35,000 25,000   Selling General and Administrative Expenses - 15,000 15,000    Operating Income = 20,000 10,000   Other Income and Expenses - 8,000 8,000    Pre-Tax Income = 12,000 2,000   Taxes - 2,400 400    Net Income = 9,600 1,600