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Income StatementIncome Statement

Yiannis Megaloeconomou, MBAYiannis Megaloeconomou, MBA

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Income statement•What it is•Purpose and significance•Meaning of revenue and expense•Related financial accounts•How it works•Cost of Goods Sold•Different P&L formats•Budgeted income statements•Practicing the P&L

Income Statement Yiannis Megaloeconomou, MBA

What is an Income Statement?What is an Income Statement?also called as the Profit and Loss account/statement or briefly as P & L

•It is a major financial statement for any type of business globally

•You don’t have to be an accountant to read it

•Required to be completed ‘usually’ on an annual basis for reporting purposes

•For internal purposes can be completed at any timeIncome Statement Yiannis Megaloeconomou, MBA

PurposePurpose

(e.g. sales revenue)

(e.g. salaries and wages, rents, utilities)

SignificanceSignificanceThe income statement is of great significance, especially, for the owners and managers of the business:

Shows the ability to:• Attract customers from business

operations and generate sales revenue• Manage expenses related to business

operations• Most importantly, generate profits for

the owner(s)


What is sales revenue? What is sales revenue?

Revenue produced from the sale of goods and/or provision of services

• Sale and delivery of beverages to customers

• Provision of spa therapy services to customers

Synonyms for sales revenue are: sales, revenue, turnover, sales turnover


What is an expense?What is an expense?The use of economic resources to produce sales revenue

Use of food & beverages produce sales for a restaurant (Cost of goods sold)

Use of employees’ services for the provision of services to customers to generate sales (Salaries expense)


Sample Income StatementSample Income Statement

BOBY’s RestaurantINCOME STATEMENT year ending 2013

Income: Sales Revenue 895,000Cost of Goods Sold (F&Bs) -242,000Gross profit or Gross margin 653,000

Other operating expenses: Salaries & Wages expense 250,000Administrative and General expense 29,000Marketing expense 32,000Utilities expense 59,000Maintenance expense 27,000Licenses and permits 8,000Total operating expenses 405,000

Income Before Taxes 248,000Income Taxes @ 30% -74,400Net Income or Net Profit 173,600

653,000

- 405,000

248,000248,000 * 30%

Expense

Expense

Expense

Sample Income StatementSample Income StatementCorner Manufacturing Inc. INCOME STATEMENT year ending 2013

Income: Sales Revenue 2,500,000Cost of Goods Sold -750,000Gross margin 1,750,000Other operating expenses: Salaries & Wages expense 750,000Advertising & Communication expense 50,000Audit & Secretarial expense 25,000Transportation & Traveling expense 37,500Office supplies expense 1,000Depreciation expense 17,000Amortization expense 3,000Interest expense 2,000Insurance expense 5,000Total operating expenses 890,500Income Before Taxes 859,500Income Taxes @ 30% -257,850Net Income or Net Profit 601,650


Operating OutcomesOperating Outcomes


Cost of Goods Sold – COGSCost of Goods Sold – COGS

The first expense that you usually see in the income statement is the Cost of Goods Sold (COGS) or sometimes called cost of sales (COS)

The cost of goods sold refers to the cost of the items a business has sold during a period


Cost of Goods Sold – COGSCost of Goods Sold – COGS

The Cost of Goods Sold is calculated by the following formula:

Note: the closing inventory of one period becomes the opening of the next period

Opening inventory of (F&Bs) at the beginning of period

Purchases of (F&Bs) during the period

Closing inventory of (F&Bs) at the end of period

Cost of Goods Sold of (F&Bs) during the period

Cost of Goods Sold – GOGSCost of Goods Sold – GOGSCalculation Example (Cost of Goods Sold)

A restaurant’s opening inventory of foods & beverages on Jan. 1st 2013 was 8,950.

During 2013 purchases of foods and beverages amounted at 295,350.

At the end of 2013 the value of the closing/remaining foods and beverages was 12,530. What was the Cost of Goods Sold for foods and beverages for the year 2013?


Cost of Goods Sold – GOGSCost of Goods Sold – GOGS

8,950

295,350

12,530

291,770

opening inventory on Jan. 1st 2013

during 2013 purchases

at the end of 2013 the value of the closing inventory

Cost of Goods Sold during 2013


Another Format of Income Another Format of Income StatementStatement

Sales

Revenue COGS Payroll

expensesOther

expensesIncome/

Total

Departmental income (loss): Rooms 1,050,000 0 235,000 11,000 804,000Food 770,000 310,000 298,000 60,000 102,000Beverage 321,000 102,000 82,000 13,000 124,000Gift shop 35,000 10,000 8,000 300 16,700Operating Departmental Total 2,176,000 422,000 623,000 84,300 1,046,700

Undistributed operating expenses: Administrative & general expenses 113,000 120,000 233,000Marketing expenses 32,000 30,000 62,000Property operations & maintenance 51,000 48,000 99,000Total undistributed operating expenses 196,000 198,000 394,000Income before fixed expenses 652,700

Fixed expenses: Property taxes 100,000Insurance expense 20,000Interest expense 80,000Depreciation expense 145,000Total fixed expenses 345,000Income before taxes 307,700Income tax @35% 107,695Net Income 200,005

SEAVIEW Hotel – Income Statement (Year ending Dec. 31, 2013)

SEAVIEW Hotel – Income SEAVIEW Hotel – Income StatementStatement

SEAVIEW Hotel - BOBY’s RestaurantComparison

1. It includes operating results (revenue and expenses) by profit center (rooms, foods, beverages, and gift shop)

2. It also includes operating results (expenses) for other departments/areas of the business (marketing, operations, maintenance, etc.)

3. It has a separate section for the fixed expenses

DINODINO’’s Catering s Catering Budgeted Income Budgeted Income StatementStatement

BUDGETED 6-MONTH P&L JAN FEB MAR APR MAY JUN

Sales Revenue 29,000 32,000 35,000 39,000 43,000 47,000Cost of Goods Sold 8,700 9,600 10,500 11,700 12,900 14,100Gross margin 20,300 22,400 24,500 27,300 30,100 32,900

Operating expenses: Salaries & Wages 8,700 9,600 10,500 11,700 12,900 14,100Administrative and General 3,210 3,210 3,210 3,210 3,210 3,210Selling & Marketing 4,000 4,000 4,000 4,000 4,000 4,000Utilities 3,000 3,000 3,000 3,000 3,000 3,000Other operating expenses 1,000 1,000 1,000 1,000 1,000 1,000Total operating expenses 18,910 19,810 20,710 21,910 23,110 24,310

Operating Income 1,390 2,590 3,790 5,390 6,990 8,590

ENDING CASH 31,390 33,980 37,770 43,160 50,150 58,740 STARTUP CAPITAL 30,000

Gross Margin

TotalOperating expenses

Operating Income

PINO PIZZA PINO PIZZA Budgeted Income Budgeted Income StatementStatement

BUDGETED 6-MONTH P&LAn example with a negative cash balance

JAN FEB MAR APR MAY JUNSales Revenue 21,000 22,000 23,000 23,500 24,000 25,000Cost of Goods Sold 5,880 6,160 6,440 6,580 6,720 7,000Gross margin 15,120 15,840 16,560 16,920 17,280 18,000

Operating expenses: Salaries & Wages expense 14,550 14,550 14,550 14,550 14,550 14,550Administrative and General expense 3,000 3,000 3,000 3,000 3,000 3,000Marketing expense 4,000 4,000 4,000 4,000 4,000 4,000Utilities expense 3,000 3,000 3,000 3,000 3,000 3,000Other operating expenses 1,000 1,000 1,000 1,000 1,000 1,000Total operating expenses 24,550 24,550 24,550 24,550 24,550 24,550Operating Income -9,430 -8,710 -7,990 -7,630 -7,270 -6,550 ENDING CASH 20,570 11,860 3,870 -3,760 -11,030 -17,580 STARTUP CAPITAL 30,000

RemarksRemarksIncome statement is a financial report that relates to a business’ operating effectiveness

There several ways to construct an income statement depending on the needs of the owner and other stakeholders

Regardless of the format or design the income statement is used, its content and operating results remain the same


Things to RememberThings to Remember

There are available financial models of income statements in excel files which you can have for personal use to record your actual or budgeted operating results

In addition, there are income statement practice problems along with their solutions


learn finance - income statement

Economy & Finance

expense expense expense

income taxes

net income

utilities expense

general expense

marketing expense

depreciation expense

amortization expense