BUSINESS Removing the Voodoo from Finance and Accounting XYZ Company Income Statement Revenue/Income: Income/Revenue Less Cost of Sales Gross Profit Gross Margin (For the year (12 months) ended December 31, 2018) $1,000,000 (also called Sales) $-600,000 (costs directly related to the Income/Revenue/Sales) $400,000 (Subtract Cost of Sales from Income/Revenue/Sales) 40% (Gross Profit as a percent of Income/Revenue/Sales) Expenses: (individual expense amounts have been consolidated into the Total Expense number ***) Payroll/wages, Payroll taxes, Benefits, Insurance, Rent, Utilities, Phone, Travel, Marketing, Internet, Vehicle expense, Depreciation *** Less Total Expense Net Income/Profit _________________________________________________________________ $-350,000 ======================================================================================= $50,000 (before taxes) FIgure 1. An Income Statement reflects activity for a period of time, whereas a Balance Sheet reflects the company’s position at a particular point in time. The income statement reflects your Revenue/Sales and also your Expenses. When you subtract your Expenses from your Revenue/Sales, the result is called Net Income/Profit. If your Net Income is a positive number, then you made a profit. If your Net Income (your “bottom line”) is a negative number, then you incurred a loss, and the P&L format is oſten illustrated as P/(L), where such negative numbers are presented in brackets, e.g. ($-500). Depending on the structure of your business, it may incur liability and/or pay taxes as an entity directly. Or, any tax im- plications (favorable or unfavorable) may ultimately be passed on to the owner(s) personally. Any discussion on the topic of taxes is far beyond the scope of this article and should be con- ducted with your accountant, tax preparer or other qualified professional. I should also mention that the formats of financial statements discussed in this article are applicable to for-profit companies. Not-for-profit companies use different formats and titles for their financial statements, but the content is similar. Reviewing the Monthly Income Statement Before we look at forms, let’s think about what is being por- trayed in an Income Statement. Appearing at the top of the form would be an indication that this is an Income Statement of (XYZ company name) and what period is being covered. Next, the income categories are listed and then, a total of those categories. This is where we can see the various sources of our Sales/Revenue or Income. Some companies (and indus- tries) use the term revenue instead of income, and some just use the term sales. Here’s what this might look like: 20 KEYNOTES SEPTEMBER 2019 Income: Product sales Repair/installation sales Service call revenue Other sales/revenue $ $ $ $ ================================================================= Total Income/Revenue/Sales $xxxx Cost of Sales (COS) or Cost of Goods Sold (COGS) This next section includes the costs that were directly incurred in generating the sales reflected in the Income categories previously listed under Income. This includes such items as direct labor and materials or products. In a manufacturing environment, these categories would include labor, materials, overhead and scrap. In a service business, these direct costs would likely include such direct categories as labor and materials… directly related to the income! Gross Profit (Gross Margin) Here, we are merely subtracting the direct expenses from the Income/Revenue. The term Gross Profit is oſten used inter- changeably with Gross Margin. If you actually care to know the difference, the term Gross Profit represents the dollar amount, whereas the term Gross Margin expresses that dollar amount as a percentage of Income/Sales. Let’s say that in your service business, you did a job that in- cluded both installation and sales. This means that the direct cost of your two technicians employed on this job — plus the actual products and supplies that they installed on this same job — would be recorded as Cost of Sales. WWW.ALOA.ORG
