Page 418 - Business Principles and Management

Chapter 15 • Business Financial Records

FIGURE 15-7 The income statement describes a businessÕ s profit or loss
during a specified time period.

Crown Corporation
Income Statement
For the Year Ending December 31, 20--

Revenue from Sales $800,000
Cost of Goods Sold 440,000
Gross Profit $360,000
Operating Expenses
Salaries and Wages $160,000
Advertising and Promotion 48,000
Depreciation 32,000
Utilities 20,000
Supplies Used 12,000
Other 8,000
Total Operating Expenses 280,000
Net Profit (before Taxes) $ 80,000

Crown Corporation is $360,000, which is calculated by subtracting the cost of
goods sold ($440,000) from sales revenue ($800,000).
Expenses needed to operate the business during the year are listed next on the
income statement. Operating expenses are all expenses not directly associated
with creating or buying merchandise the business sells. For example, businesses
spend money on advertising, supplies, and maintenance. For Crown Corporation,
operating expenses total $280,000. On the income statement, operating expenses
are subtracted from gross profit, $360,000, to arrive at the net profit or “bottom
line,” $80,000.
The net result of the business activity reported in the form of revenue, cost of
goods sold, expenses, and profit on the income statement appears in one form
or another on the balance sheet. For the Crown Corporation, the net profit of
$80,000 will be added to its assets (left side of the balance sheet) and capital (right
side of the balance sheet). Thus, the two sides of the balance sheet will still balance.

VALUE OF INCOME STATEMENT INFORMATION
The manager of Crown Corporation, and others who review the income statement,
can learn a great deal about the business. Specifically, the total deductions from the
$800,000 in revenue are $720,000, which consists of cost of goods sold ($440,000)
and operating expenses ($280,000). The manager can also see that the net profit
before taxes—$80,000—is a rather small part of the total revenue. Both of these
observations might warn of a possible problem with high costs relative to income.
The Crown Corporation can improve its financial controlling and budget plan-
ning by doing an item-by-item analysis of the income statement, such as that shown
in the first two columns of numbers in Figure 15-8 (see p. 406). Each expenditure

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