Tag Archives | income statement

Net Income

See Also:
Net Sales
Net Operating Loss Carryback and Carryforward
Financial Ratios
Financial Reporting
Accounts Payable

Net Income Definition

The net income definition is a company’s profit in a given fiscal period. It consists of total revenues earned in the period less total expenses incurred to generate the revenues in the period. When revenues exceed expenses, the company has a net profit. When expenses exceed revenues, the company has a net loss. Report it on a company’s income statement. Net income is an important measure of a company’s profitability and financial performance for the relevant fiscal period. Also, call it net earnings, net profit, or the bottom line.

Net Income Formula

Basically, compute this income by subtracting all relevant costs and expenses from total revenue. Start with total revenue, also known as the top line as it is shown at the top of the income statement. Then subtract the costs of sales, operating expenses, non-operating expenses, and taxes. This gives you NI. It is also known as the bottom line because it is shown at the bottom of the income statement.

NI = Revenues – Cost of Sales – Operating Expenses – Non-Operating Expenses – Taxes

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Net Income

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Net Income

 

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Operating Lease

An operating lease is a short-term off-balance-sheet lease agreement. This type of lease is not recorded on the lessee’s balance sheet. This type of lease typically spans a small portion of the asset’s useful life, and the lessor retains the risks and benefits of ownership. For example, in an operational lease, the lessor is responsible for service and maintenance of the asset throughout the duration of the lease. You can also call it a service lease.

Operating Lease Treatment

According to GAAP, property leased with this kind of lease is not recorded on the lessee’s balance sheet. Lease payments are recorded as rent expenses on the income statement.

Finance Lease versus Operating Lease

There are two main differences between capital (finance) leases and operating leases.

1. With a capital lease, the lessee must record both a lease asset and a lease liability on their balance sheet. With an operating lease, this is not required.

2. With a capital lease, the lessee assumes both the risks and benefits of owning the asset. With an operating lease, the lessor retains the risks and benefits of owning the asset throughout the duration of the lease.

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Operating Lease
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Operating Lease

See also:

Capital Lease Agreement
Commercial Lease

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Notes Receivable

See Also:
Notes Payable
Treasury Notes (t notes)
Accounts Receivable
How to collect accounts receivable
Balance Sheet

Notes Receivable Definition

The notes receivable is an account on the balance sheet usually under the current assets section if its life is less than a year. Specifically, a note receivable is a written promise to receive money at a future date. The money is usually made up of interest and principal.

Notes Receivable Explained

A note receivable is often formed when a business, usually a bank, makes a loan to another business. A note will often be for less than a year, but some can be well in excess of this time frame. Recognize notes receivable income as interest income on the income statement. Thus, when payment is made the amounts effect the balance sheet as well as the income statement.

Notes Receivable Example

Money Bank is extending a $100,000 90 day note to Toys Inc. so that they can fund some of its short term needs for financing during the year. The note has an interest rate of 5% and is recorded by the bank as a note receivable on Money’s balance sheet under the current assets section. At the end of the term, Toys inc. will pay the $100,000 in principal back to Money Bank, and approximately $1,233 (100,000 * 90/365 * .05) worth of interest. Record the amount as interest income on the incomes statement at the end of the year.

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Notes Receivable

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Notes Receivable

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Nonrecurring Items

See Also:
Restructuring Expense
ProForma Financial Statements

Nonrecurring Items

In accounting, report abnormal or infrequent gains or losses in the company’s annual report as nonrecurring items. They are rare events or activities that are not part of the company’s normal business operations. They may also be called extraordinary items. You must disclose the details of any extraordinary items in a footnote in the company’s financial statements.

Extraordinary Items

Extraordinary items can distort a company’s earnings. Therefore, analysts will often prepare a pro forma income statement, excluding the effects of the extraordinary items, to see what the company’s financial performance would’ve looked like without the distortion of the abnormal occurrence.

Nonrecurring Items Examples

Examples of nonrecurring items include losses due to fire or theft, the write-off of a company division, the acquisition of another company, or the one-time sale of a large piece of property.


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Nonrecurring Items

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Income Statement

See Also:
Compound Annual Growth Rate (CAGR)
Financial Reporting
Financial Ratios
Balance Sheet
Standard Chart of Accounts
Common Size Financial Statement
Balancing the Balance Sheet

Income Statement Definition

The income statement definition is a financial statement that shows a company’s revenues and expenses over a period of time. Furthermore, it reports a company’s financial performance over the course of an accounting period, typically a month or quarter. Basically, it starts with the money a company earns, and subtracts out the costs of running the business to get the company’s profit or loss.

Income Statement Explanation

You can also call the income statement the statement of earnings, profit and loss statement, or P&L statement. It is often divided into two sections: operating and non-operating. The operating income definition is the revenues and expenses incurred over the course of regular business operations. Then the non-operating income section shows the revenues and expenses incurred from activities that are not considered regular business operations. There may also be a section for irregular items, consisting of revenues or expenses from abnormal or nonrecurring activities. The top line of the income statement is the company’s operating revenues. The bottom line is the company’s net profit or loss.

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Income Statement Example

For example, James has started a company called Industryco. Industryco is a niche-specific telecom company. James, the founder and CEO of this Industryco, has a lot he is responsible for. For example, one responsibility of James is monitoring the income statements of the company. As a result, James, as with every month, sits down to perform income statement analysis.

First, he looks at the revenue sources of the company. The sales volume of various products and services of Industryco, multiplied by their associated price, make up these numbers.

Then, James looks at company expenses. Combine total costs to simplify the calculation of company profit. Profit, of course, is the motivation to conduct business in the first place. James is looking at the income statement, in the first place, to ensure the stability of company profit. Furthermore, this record allows him to do this with regards to a chosen time period.

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Income Statement definition

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Income Statement definition

Income Statement Template

A standardized income statement sample can be found at the Microsoft webpage. It serves as an excellent income statement template to customize for company needs.

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LIFO vs FIFO

See Also:
Inventory Turnover Ratio Analysis
Inventory to Working Capital
Perpetual Inventory System
Just in Time Inventory System
Work in Progress

LIFO vs FIFO – Last In, First Out vs First In, First Out

In the field of accounting, LIFO vs FIFO are two methods of valuing inventory. LIFO assumes the last items acquired are the first sold, and the first items acquired remain in inventory. FIFO assumes the first items acquired are the first sold, and the items acquired most recently remain in inventory. Both methods are approved by GAAP.

The idea is that a company accumulates inventory over time. And the items in inventory were purchased at differing prices. As products are sold, inventory costs move from the balance sheet to the income statement. Accountants have the option of valuing the items sold and the items remaining in inventory according to the oldest or the most recent costs of the inventory.

FIFO and LIFO are merely methods for recording and reporting the cost of inventory and have nothing to do with the actual flow of physical inventory. For example, a company can sell its oldest inventory first, and still use the LIFO method for financial reports.

FIFO Inventory Method

The FIFO inventory method assumes the first items acquired are the first sold, and the items acquired most recently remain in inventory.

A new firm may want to use FIFO to increase the value of the assets on its balance sheet. Assuming prices rise over time, the oldest inventory will be the cheapest. Expensing the oldest inventory first comparatively decreases the cost of goods sold, increases net income, and increases the value of inventory on the balance sheet because the items remaining in inventory are the most recent and costly items.

LIFO Inventory Method

The LIFO inventory method assumes the last items acquired are the first sold. And the first items acquired remain in inventory.

Using LIFO can have tax advantages. Since prices typically rise over time, the most recent inventory acquired is the most expensive. Expensing the most costly inventory will increase the cost of goods sold and decrease the taxable income. Refer to this as the LIFO reserve.

Average Cost Inventory Method

The average cost inventory method is another way to value inventory. This method simply uses the average cost of the items in inventory. In addition, they use this cost to value the items sold as well as the items that remain in inventory. To calculate the average cost of the inventory, divide total cost of goods available for sale by number of units available for sale.

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lifo vs fifo, FIFO Inventory Method, LIFO Inventory Method

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lifo vs fifo, FIFO Inventory Method, LIFO Inventory Method

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Prepare an Investor Package

See Also:
How to Prepare a Breakeven Analysis
Contribution Margin
Cost Volume Profit Model
ProForma Financial Statements
Net Profit Margin Analysis

Prepare an Investor Package

The Investor Package serves as a medium to visually communicate to the Owner/Management financial information which they might otherwise have difficulty digesting in financial statements. This is not unusual since many entrepreneurs have a better intuitive grasp of the financials rather than an analytical understanding. A secondary benefit to prepare an Investor Package is that the preparer is able to share this information with banks, suppliers or any other concerned parties.

The impact of the Investor Package contrasts with the effort to create it. Based on historical experience, the Owner/Management appreciated the value of the Investor Package more so than the many analyses and hard efforts put forth for other projects. Much of this has to do with how the graphical nature of the Investor Package allows the entrepreneur to intuit the financial statement.

At it’s core, the Investor Package is collection of graphs that tells a story about the company’s financial health.

The biggest challenge to setting up the Investor Package is access to good information. The most important inputs are current and projected monthly financial statements. This means that you may need to finish certain projects before you can start on the Investor Package. Once complete, it will be necessary to maintain the graphs by inputting the information in on a monthly or quarterly basis.

Accumulate Info

In order to successfully create the Investor Package the company’s financial information will need to be gathered and/or created: Current Monthly Financial Statements (Balance Sheet and Income Statement), Updated Cash Flow Projections (Balance Sheet, Income Statement and Cash Flow Statement) and Financial Statements from last 4 years (Balance Sheet, Income Statement and Cash Flow Statement). Note: This is optional depending on whether or not you would like to bring in historical financials as a comparison to current fiscal year performance.

Input Financial Info

Once you have gathered and/or created all the necessary financial statements, it will now be time to enter the appropriate data into the template. The 10 core graphs in the Investor Package all draw from the following information: Revenue, Net Income, Working Capital, Debt to Equity, Accounts Receivable, Days Accounts Receivable Outstanding, Inventory, Cost of Sales, Average Days in Inventory, Current Month Balance Sheet and Current Month Income Statement.

Customize Graphs

Determine what graph(s) you want to include in the Investor Package. Determine what additional information you will need: Do you need to create a new table for inputting the data? Will it be possible to use existing information already there? What 4-year historical information will you need (if any)? Create a new input table as necessary in the Input Section. Key in the appropriate information into their respective tables in the Input Section. Create a new graph in Excel and link to the appropriate cells in the Input Section.

Maintain Monthly/Quarterly

Once you tailor the Investor Package to meet the company’s needs, you have set up the basic infrastructure. The task will now shift to maintain the package by continuously updating it with current financial information. Maintenance should be done on either a monthly or quarterly basis.

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Prepare an Investor Package

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Prepare an Investor Package

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