Page 417 - Business Principles and Management

Unit 5

last year without an increase in liabilities. If Crown wished to do so, it could also
compare some information on its balance sheet with that of other businesses of
similar size and kind. Published information is available from several sources, such
as trade associations. With comparative figures, the business can make judgments
about its success and perhaps even find ways to improve its financial picture in
the future.

CHECKPOINT

How does the term balance sheet reflect the organization of
information in the financial statement?

The Income Statement

The income statement, or profit and loss statement, is a financial statement that
reports information about a company’s revenues and expenses for a specific
period. Income statements are usually prepared monthly, quarterly, or semiannu-
ally. An annual income statement is also needed. Income statements have three
major parts:
1. Revenue—income earned for the period, such as from the sale of goods
and services
2. Expenses—all costs incurred in operating the business, such as the cost of
materials used to manufacture the company’s products
3. Profit or loss—the difference between total revenue and total expenses

When revenue is greater than expenses, the company has earned a profit.
When expenses are greater than revenue, the company has incurred a loss. The
income statement shows the financial performance (profit or loss) that occurs
over a period of time. The balance sheet, on the other hand, shows the financial
condition of a business at a particular point in time. Both types of financial state-
ments serve useful but different purposes. An example of an income statement is
facts shown in Figure 15-7. The period covered for the Crown Corporation is one
&
year, as shown in the heading.
figures KINDS OF FINANCIAL DATA

The revenue for the Crown Corporation comes from one source—the sale of
jewelry. Total revenue for the year was $800,000. If the company earned other
Today, most well-run factories income, such as from the repair of jewelry, the income from this source would
and retail stores do an excellent be listed separately under Revenue.
job of managing inventories To earn revenue, a retail business purchases merchandise from suppliers and
of raw materials and finished sells it to customers at a profit. The amount the retailer pays the supplier for the
goods. Managers know that merchandise it buys and sells is called cost of goods sold. In a manufacturing busi-
being caught with excessive in- ness, the cost of goods sold would include the amount the company paid for raw
ventory costs money for storage materials and parts to make its products.
and ties up money that might Generally, the cost of goods sold is a rather large deduction from revenue. To
be better used elsewhere in the make the cost of goods sold easy to identify on the income statement, it is listed
business. However, inadequate separately from other deductions. Gross profit is the amount remaining after sub-
inventory results in reduced tracting the cost of goods sold from revenue. Net profit is the amount remaining
production and lost sales. after subtracting all expenses from revenue, except taxes. Gross profit for the

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