M4-Income Statement & Balance Sheet (Theory )
M4-Income Statement & Balance Sheet (Theory )
Corporate finance and accounting use the income statement as one of the
significant financial statements. This income statement includes gross profit,
revenue, costs, taxes paid, net profit, selling and administrative expenses, other
expenses, and income, etc.
This income statement is used as a great base to start a financial report because
most of the information is available in this statement.
Revenue/Sales – At the top of the statement, every firm’s sales and service revenue are
shown.
Cost of Goods Sold (COGS) – It is a line-item that sums up the direct costs related to
goods sold to make revenue. If the company is a service business, COGS is also known
as the cost of sales.
Gross Profit – It is determined by subtracting the cost of goods sold from sales revenue.
Depreciation & Amortization Expense – These are non-cash charges. A few examples
are depreciation charged on plant, property, and equipment (PP&E).
Interest – It is divided into interest income and interest expense line in the income
statement.
Income Statement Format
Company ABC’s Annual Income Statement
Revenue xxx
xxx
Operating Expenses
xxx
Salaries
xxx
Rent
xxx
Amortization
xxx
Depreciation
Operating Income xxx
Interest Expense xxx
Tax xxx
Net Income xxx
Amit Keyboard Shop’s Annual Income Statement For the Year-End December 2015
Revenue
Balance Sheet
A balance sheet is a financial statement that contains details of a company’s
assets or liabilities at a specific point in time. It is one of the three core
financial statements (income statement and cash flow statement being the
other two) used for evaluating the performance of a business.
Creditors, investors, and other stakeholders use this financial tool to know the financial status of
a business.
It is used to analyse a company’s growth by comparing different years.
While applying for a business loan, a company has to submit a balance sheet to the bank.
Stakeholders can find out the business accomplishment and liquidity position of a company.
Company’s balance sheet analysis can detect business expansion and future expenses.
The main purpose of the balance sheet is to show a company’s financial status. This sheet
shows a company’s assets and liabilities, along with the money invested in the business. This
statement is required to analyze the financial status information for several consecutive
periods.
Generally, investors and creditors look at the balance sheet of the company to understand
how effectively a company will use its resources and how much it can give in return. Though
the balance sheet can be prepared at any time, it is mostly prepared at the end of the
accounting period. The balance sheet can be created at any time. However, it is often
prepared at the end of the financial year.
1. Current assets: Assets which can be easily converted into cash or cash
equivalents within a duration of one year. Examples include short-term
deposits, marketable securities, and stock.
2. Fixed assets: Assets which cannot be easily or readily converted to cash. For
example, buildings, machinery, equipment, or trademarks.
b. Physical existence: Assets can be of two types, tangible and intangible.
1. Tangible assets: Assets which you can see and feel, like office supplies,
machinery, equipment, and buildings.
2. Intangible assets: Assets which do not have physical existence, like patents,
brands, and copyrights.
Liabilities are what the company owes to other parties. This includes debts and
other financial obligations that arise as an outcome of business transactions.
Companies settle their liabilities by paying them back in cash or providing an
equivalent service to the other party. Liabilities are listed on the right side of the
balance sheet.
2. Non-current liabilities: These are debts or obligations for which the due date is
more than a year. Non-current liabilities, also called long-term liabilities, include
bonds payable, long-term notes payable, and deferred tax liabilities.
The equity value can be positive or negative. If the shareholder’s equity is positive,
then the company has enough assets to pay off its liabilities. If it is negative, then
liabilities exceed assets.
Balance sheet formula & equation
The balance sheet equation follows the accounting equation, where assets are on
one side, liabilities and shareholder’s equity are on the other side, and both sides
balance out.