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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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Unit 4 income statements

Unit 4 Income Statements

Business Management


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

Income Statement

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


Uses of the income statement

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

Reporting Income and Expenses

  • Cash Method

  • Accrual Method


Cash 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

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

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 Transactions

  • Cash Revenue

  • Cash Expenses-summary and coded

  • Depreciation

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


Cash income statement

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

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

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

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

Variable Costs

  • Costs that vary with production levels


Fixed costs

Fixed Costs

  • Costs that remain constant with changes in production


Analysis

Analysis

  • Operating ratio=

  • Fixed ratio=

  • Gross ratio=


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