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Unit 4 Income Statements. Business Management. Business Analysis. Risk Solvency. Feasibility Liquidity Repayment Capacity. Statement of Cash flows. Balance Sheet. Statement of Owners’s Equity. Income Statement. Profitability Financial Efficiency. Income Statement.

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Business Management

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Unit 4 Income Statements

Business Management


Business Analysis

Risk

Solvency

Feasibility

Liquidity

Repayment

Capacity

Statement of Cash flows

Balance Sheet

Statement

of

Owners’s

Equity

Income Statement

Profitability

Financial Efficiency


Income Statement

Definition: A summary of income and expenses for a given period of time.


Uses of the Income Statement

  • Reporting income and expenses on tax returns

  • Required on loan applications

  • Financial analysis of business

  • Explain changes in Owner’s Equity


Reporting Income and Expenses

  • Cash Method

  • Accrual Method


Cash Method

  • Income must be reported in the year the cash, or its equivalent is received.

  • Deductions for expenses are made in the year that the cash is paid out.


Cash method- Advantages

  • Flexibility- choose when to take income and deduct expenses.

  • More favorable capital gains tax treatment than accrual method.

  • If business shows a profit, cash is available to pay the income tax.


Cash Method- Disadvantages

  • Expenses are not deductible until cash is paid.

  • Inventory adjustments must be made to compute an income statement and analysis information.

  • Income reported is more erratic.


Cash Transactions

  • Cash Revenue

  • Cash Expenses-summary and coded

  • Depreciation

  • Gain or Loss on Sales of Capital Assets- Capital Gains/Losses


Cash Income Statement

  • Do Assignment #1---Cash Income Statement for GYFS

  • Information on Website

  • Create a new page in your Excel spreadsheet assignment file.


Accrual Method

  • Inventories must be used to determine gross income. Sales are treated as income when the price of the item is recoverable.

  • Expenses are deductible when payable.


Accrual Method-Advantages

  • Levels out peaks and valleys of income without year-end manipulations.

  • Easier to determine net income and analyze strong and weak points of the business from year to year than with the cash method.


Accrual Method-Disadvantages

  • very detailed and complex records are required.

  • Inventory must be valued by an approved IRS method.

  • In some years profit may only appear on paper, and money may have to be borrowed to pay income tax.

  • Difficult to determine actual cash position of the business.


Variable Costs

  • Costs that vary with production levels


Fixed Costs

  • Costs that remain constant with changes in production


Analysis

  • Operating ratio=

  • Fixed ratio=

  • Gross ratio=


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