The Income Statement
The income statement (also called the profit & loss
statement) shows how much money a business makes
or loses over a specific time period - a month, 3
months, 6 months or a year. Income statements are
often prepared 4 times a year but never cover a
period longer than a year. When income statements
are prepared, management or its accountants extract
sales and other income totals along with totals of
various expenses from internal accounting records.
Once expenses are computed, they are subtracted
from income and either a profit or loss is shown. The
results on the income statement affect the balance
sheet from period to period, so it is important to review
both statements to determine the full impact each has
on the other.

Income Statement - Net Sales
The net sales figure is derived by adding up the total
invoices billed to customers during the period covered,
less any discounts taken by customers. Then, any
sales returns accepted from customers during the
period are deducted. Deductions can be important in
some industries. (For example, in retailing they can
run over 10 percent.) After deductions are made, the
remaining figure in net sales which is important for
comparative analysis and percentage calculation.

Income Statement - Gross Profit
Gross profit is found by subtracting the cost of goods
sold from net sales. Cost of goods sold is comprised of
those expenses it took to manufacture, purchase
merchandise and service customers. The cost of
goods sold takes into account material costs along
with labor and factory expenses involved in producing
the merchandise sold.

Gross profit measures the profitability of a company's
total production.  A successful company's gross profit
will cover its costs of doing business with enough left
over to produce a net profit.

Income Statement - Net Profit After Tax
Before coming up with the net profit after tax (often
called net income after tax), you should be aware that
all expenses directly applicable to the company's
operations, including income taxes, have been
deducted from gross profit. Net profit after tax truly
measures the operating success of the company.
When total expenses exceeds net sales, a minus
figure results and a loss has occurred. If there is a
surplus, it is considered net profit and can be added to
retained earnings or distributed to owners and
stockholders as withdrawals or dividends.  When
expenses exceed net sales (when a loss occurs), it is
charged against net worth and a reduction in the
owners' equity occurs and is shown on the balance

Income Statement - Dividends/Withdrawals
This item can be very important, depending on the
type of business you are reviewing - corporation,
partnership or proprietorship. In the case of a
partnership or proprietorship, this figure would
represent withdrawals by the owners of the business.
When withdrawals or dividends exceed profits they
diminish net worth. This situation may have an
adverse effect on the financial stability of the business.

Working Capital
Working capital represents the funds available to
finance current business operations. Many companies
show this computation prominently in their statement,
but in some instances you may want to compute it on
your own. This figure is important, as it is used to
determine how much excess cash a business has to
fund current expenses. Working capital is the
difference between current assets and current
liabilities. Since a company's sources to pay its current
debt come partly from current assets, a business with
a comfortable margin should be able to pay its bills
and operate successfully. How much working captial is
enough depends on the proportion of current assets
to current liabilities rather than on the dollar amount of
working capital. We'll take up this ratio shortly;
however keep in mind that it is good to have two
dollars or more of current assets to one dollar of
current liabilities than to have less, for most
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Analysis - Page 3
Income Statement