Joseph Fabiilli is describing, Do You Know Income Statement Formula? He briefly explains all the criteria about Income Statement Formula.

1. Joseph Fabiilli
Do You Know Income Statement
Formula ?

2. What is Accounting?
Recording, classifying,
summarizing, &
interpreting financial
events & transactions
to provide management
& other parties
information to allow
them to make good
decisions.

3. Financial Transactions
Include buying &
selling goods &
services, acquiring
insurance, using
supplies, & paying
taxes.

4. Bookkeeping's Role
• Bookkeeping -- The recording of business
transactions. Bookkeepers divide a firm’s
transactions into meaningful categories and post
them into a record book or computer program called
a journal.

5. What Bookkeepers Do
• Categorize
and
• Record the Data
in
• Books of Original
Entry
–Journals
–Ledgers
using
• Double Entry

6. Bookkeeping's Role
• Double-Entry Bookkeeping -- Bookkeepers
record all transactions in two places so they can
check one list of transactions against the other for
accuracy.

7. General Journal

8. Ledger T-Account

9. The Accounting Cycle

10. Steps In The
Accounting Cycle
Analyze Source
Documents
Record
Transactions
in Journals
Post Journal
Entries to Ledger
Take a
Trial Balance
Prepare
Financial
Statements
Analyze
Financial
Statements

11. Financial Statements

12. Financial Statements
Balance Sheet – Statement of
Financial Position (on a specific date)
Income Statement – Statement of
Revenues, Expenses, & Profits (specific
period of time)
Statement of Cash Flows –
Statement of Cash Receipts &
Disbursements (cash coming in & cash
going out)

13. Balance Sheet
Statement of Financial Position
(on a specific date)

14. Accounting (Balance
Sheet) Equation
Assets Liabilities + Owner’s Equity
Owns Owes + Owners’ Claims
=
=

15. Terms
Liquidity
– How fast an asset can be
converted into cash

16. Classifying Assets
• Current Assets -- Items that can or will be
converted to cash within one year.
• Fixed Assets -- Long-term assets that are
relatively permanent such as land, buildings, or
equipment.
• Intangible Assets -- Long-term assets that
have no physical form but do have value such
as patents, trademarks, and goodwill.

17. Classifying Liabilities
• Liabilities -- What the business owes to others - its
debts.
• Accounts Payable -- Current liabilities a firm owes
for merchandise or services purchased on credit.
• Notes Payable -- Short or long-term liabilities a
business promises to pay by a certain date.
• Bonds Payable -- Long-term liabilities that the firm
must pay back.

18. Owners’ Equity Accounts
• Retained Earnings --
Accumulated earnings
from the firm’s profitable
operations that are
reinvested in the business.

19. Very Vegetarian’s
Balance Sheet (Assets)
Period ending 12/31/08
Assets
Current Assets
Cash $ 15,000
Accounts Receivable 200,000
Notes Receivable 50,000
Inventory 335,000
Total Current Assets $600,000
Fixed Assets
Land $ 40,000
Buildings (net) 110,000
Equipment & Vehicles (net) 40,000
Furniture & Fixtures (net) 16,000
Total Fixed Assets $206,000
Intangible Assets
Goodwill $ 20,000
Total Intangible Assets $ 20,000
Total Assets $826,000

20. Very Vegetarian’s Balance Sheet
(Liabilities & Owner’s Equity)
Period ending 12/31/08
Liabilities & Owners’ Equity
Current Liabilities
Accounts Payable $ 40,000
Notes Payable 8,000
Accrued Taxes & Salaries 240,000
Total Current Liabilities $288,000
Long-term Liabilities
Notes Payable $ 35,000
Bonds Payable 290,000
Total Long-term Liabilities $325,000
Total Liabilities $613,000
Owners’ Equity
Common Stock (1M shares) $100,000
Retained Earnings 113,000
Total Owners’ Equity $213,000
Total Liabilities & Owners’ Equity $826,000

21. Income Statement
Statement of Revenues, Expenses, & Profits
(specific period of time)

22. Income Statement Equation
Profit = Revenues – Expenses

23. Income Statement Formula
Revenues
–Cost of Goods Sold
=Gross Profit (Gross Margin)
–Operating Expenses
=Net Income Before Taxes
–Taxes
=Net Income (or Loss)

24. Very Vegetarian Income Statement
Period Ending 12/31/10
Revenues
Net Sales $ 700,000

25. Very Vegetarian Income Statement
Period Ending 12/31/10
Revenue
Net Sales $ 700,000
Cost of Goods Sold
Beginning Inventory $ 200,000
Purchases During the
Year $ 440,000
Cost of Goods Available
for Sale During the Year $ 640,000
Less: Ending Inventory $ 230,000
Less: Cost of Goods Sold $ 410,000
Gross Profit (Gross Margin) $ 290,000

26. Income Statement Formula
Revenues
–Cost of Goods Sold
=Gross Profit (Gross Margin)
–Operating Expenses
=Net Income Before Taxes
–Taxes
=Net Income (or Loss)

27. Very Vegetarian’s
Income Statement (cont’d)
Gross Profit $290,000
Operating Expenses
Selling Expenses
Salaries $ 90,000
Advertising & Supplies $ 20,000
Total Selling Expenses $ 110,000
General Expenses
Office Salaries $ 67,000
Depreciation $ 1,500
Insurance $ 1,500
Rent $ 28,000
Utilities $ 12,000
Miscellaneous $ 2,000
Total General Expenses $ 112,000
Less: Total Operating Expenses - $ 222,000
Net Income (Profit) Before Taxes $ 68,000
Less: Income Tax Expenses - $ 19,000
Net Income (Profit) After Taxes $ 49,000

28. Statement of Cash Flows
Statement of Cash Receipts & Disbursements
(cash coming in & cash going out)

29. Statement of Cash Flows
Reports cash receipts and disbursements
related to the firm’s major activities:
Operations – cash transactions
associated with running the business
Investments – cash used in or provided
by firm’s investment activities
Financing – cash raised from the
issuance of new debt or equity capital
or cash used to pay business
expenses, past debts, or company
dividends

30. Depreciation
Depreciation -- The systematic write-
off of the cost of a tangible asset over
its estimated useful life.

31. Ratio Analysis

32. Using Financial Ratios
• Ratio Analysis -- The assessment of a firm’s
financial condition using calculations and
financial ratios developed from the firm’s
financial statements.
• Key ratios include:
- Liquidity ratios
- Leverage ratios
- Activity ratios

33. Liquidity Ratios

34. Commonly Used
Liquidity Ratios
• Liquidity ratios measure a firm’s ability to turn
assets into cash to pay its short-term debts.
• Two key ratios are:
- Current ratio
- Acid-test ratio
• This information is found on the firm’s Balance
Sheet.

35. Liquidity Ratios
Current Assets
Current Liabilities
Quick (Acid-Test) Ratio
Cash + Marketable Securities + Receivables
Current Liabilities
Current Ratio

36. Liquidity Ratio
Current Assets
Current Liabilities
Current Ratio

37. Current Ratio- Very Vegetarian
$600,000
$288,000
= 2.08
Current Assets
Current Liabilities

38. Quick (Acid-Test) Ratio
$265,000
$288,000
= 0.92
Cash + Marketable Securities + Receivables
Current Liabilities

39. Leverage (Debt) Ratios
• Leverage ratios measure the degree to which a
firm relies on borrowed funds in its operations.
• Key ratios include:
- Debt to Owner’s Equity Ratio
• This information is found on the firm’s Balance
Sheet.

40. Debt to Equity Ratio
$613,000
$213,000
= 287%
Total Liabilities
Owners’ Equity

41. Activity Ratios
Inventory Turnover = $410,000 = 1.9
$215,000
Inventory Turnover
Cost of Goods Sold
Average Inventory

42. Thank You