As crass as it sounds, business managers get paid to make profit happen. Management literature usually stresses the visionary, leadership, and innovative characteristics of business managers, but these traits aren’t worth much if the business suffers losses year after year or fails to establish sustainable profit performance.
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After all, businesses are profit-motivated, aren’t they? It’s not surprising that the income statement takes center stage in business financial reports. The income statement summarizes a company’s revenue and other income, expenses, losses, and bottom-line profit or loss for a period. The income statement gets top billing over the other two primary financial statements (the balance sheet and the statement of cash flows), which I discuss later in this chapter.
The income statement is referred to informally as the Profit & Loss or P&L statement, although these titles are seldom used in external financial reports. (Alternatively, it may be titled Earnings Statement or Statement of Operations.) Financial reporting standards demand that an income statement be presented in quarterly and annual financial reports to owners. But financial reporting rules are fairly permissive regarding exactly what information should be reported and how it’s presented.
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Question/Problem
Take a look at this extremely abbreviated and condensed income statement for abusiness’s most recent year. (Note: A formal income statement in a financialreport must disclose more information than this.)
Income Statement for Year
Sales revenue $26,000,000
Expenses 24,310,000
Net income $1,690,000
This business sells products, which are also called goods or merchandise. The cost of products sold to customers during the year was $14,300,000. Expand the condensed income statement to reflect this additional information
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Solution/Answer
Income statement reporting requires a company to show the cost of goods (products) sold as a separate expense and deduct it immediately below sales revenue. The difference must be reported as gross margin (or gross profit). Therefore, the condensed income statement should be expanded as follows:
Income Statement for Year
Sales revenue $26,000,000
Cost of goods sold 14,300,000
Gross margin $11,700,000
Other expenses 10,010,000
Net income $1,690,000