FINANCIAL MANAGEMENT Chapter 17 THE INCOME STATEMENT The income statement is a summary of financial information for a defined accounting period. THE INCOME STATEMENT The income statement (also called a Profit and Loss Statement [P & L] or a Statement of Operations) shows whether the business made or lost money during the period being reported. For this reason, it presents important information to all stakeholders of the operation. Owners; Investors; Creditors; Managers …. THE INCOME STATEMENT An important difference between the income statement and the balance sheet is that the income statement represents a period of time and the balance sheet represents a given point in time. An income statement is said to be dynamic, whereas the balance sheet is static. The cost of food sold in a foodservice establishment is calculated using the following procedure: THE INCOME STATEMENT Gross profit or income is calculated by subtracting cost of goods sold from sales or revenue. The remaining expenses may be categorized as controllable or noncontrollable or, as in the example, labor costs and operating expenses. The net profit or loss is calculated by subtracting labor and other operating expenses from gross profit. THE INCOME STATEMENT The figures for preparing this statement are taken from the cash ledger, income and disbursements, and from the beginning and ending physical inventory figures. A simple summary of the profit and loss statement is shown here: - The two main statement that we can use to know for doing well in terms of Profit and loss are: A- the first documents is the income statement B- the second document is the balance sheet - The income statement its also known as P and L; profits and losses and this Is a statement that is usually issues over a specific period of time maybe Monthly or weekly; and this tell us about how much we are losing or how Much we are making money during a certain period of time. - Maybe the stoke holder this those who have a share on the company, owners, Investors …., looking at that document and tell if there doing well and compare Over time if there improving or not. Comparison between the income statement and the balance sheet. - The income statement really tell us at the end how much we actually made During a certain period of times, whereas the balance sheet just telling us how Much we are worse at a certain points of time. - The income statement is usually issues monthly, maybe weekly whereas The balance sheet is often made out to see how much our net work as at a certain point of time. - The income statements is set to be dynamic, where is can be change it over Time whereas the balance sheet is set to be static we cannot change it less Chance to change. - In terms of income statements [slide 5,6,7]; A- we determine actually how much we paid for a food product that we sold B- we add how much inventory at the beginning of the period that we are doing the income statement form for example for the month. C- we determine how much purchases we maid D- we determine how much we still have left = value of available food. E- and then less inventory at end of the period and then equal costs of good sold during this periods. - This is mean for example A- If we have an inventory, lets say we have 1000$ word of stoke on our stores (at the beginning pf the period) B- then we add how much we actually purchase during that period where we are making the income statement form. C- the total is equal too how much available food we have. D- we subtract from that how much inventory we still have in our stores. E- this is equal to the costs of good sold during that period, that are giving actually that how much the food costs during a certain period of time. - So in the end the income statement form tell us how much our net income is (how much we made at the end or over a certain period of time). - We must calculate all the costs that we include during this period and then we subtract from how much we actually sold, and this is give us an idea On how much we actually maid during that time (during a specific period Of time). - The income statement is usually used by the stokes holder, the manager in order to see if we doing well over a certain period or not. THE BALANCE SHEET The balance sheet provides information about the value of a business and how well its assets have been used to meet the financial goals of the operation. THE BALANCE SHEET The balance sheet (Figure 17.8) is a listing of assets, liabilities, and capital of an operation as of a specific date. The assets are categorized as current or fixed. THE BALANCE SHEET Current assets include cash and other assets that will be converted to cash in a short period of time, usually a year or less. Cash includes cash on hand, cash in savings and checking accounts, electronic fund transfers from credit card companies, and CDs (certificates of deposit). Assets that will be converted to cash in a short period of time include accounts receivable, inventories, prepaid expenses, and marketable securities. THE BALANCE SHEET Fixed assets are permanent, such as long-term investments, buildings, furniture, fixtures, land, large and small equipment, linen, china, and glassware. THE BALANCE SHEET Liabilities are classified as current or long-term. Current liabilities are those that must be paid within the period of a year, such as food and supplies, taxes, salaries, wages, interest, and part of the mortgage. Long-term liabilities are those that will not be paid within the coming year. These include longterm debt, mortgages, lease obligations, and deferred income taxes. THE BALANCE SHEET The Capital or Equity section of the balance sheet includes the portion of the business that represents the owners’ interest. The ownership in for-profit businesses may be a proprietorship (owned by a single individual), a partnership (owned by two or more people), or a corporation (owned by stockholders). THE BALANCE SHEET Retained earnings is the final entry in the equity section of the balance sheet. Retained earnings represents the profit that has not been distributed as dividends. If net losses have occurred, this number may be negative. As shown on the sample balance sheet, the fundamental accounting formula ASSETS = LIABILITIES + EQUITY is always followed on the bottom line of the balance sheet. - The balance sheet is a different time of tool that tell us is how much our net work us actually. - The balance sheet is categories all our assets as current or fixed (categories our assets in one side and what we have to paid for on the other side). - The assets include how much cash we have, how much saving we have on the bank accounts, how much we have deposits in to our bank account, credit card, bills that are paid (that need paid to us), so all of this will be given as a total number obviously of our assets ( what we have). - Then we go across our liabilities, the liabilities are the things we actually own (owed) such as expenses(spending/outlay), or loans from bank … - Liabilities are classified as current or long-term. Current liabilities are those that must be paid within the period of a year, such as food and supplies, taxes, salaries, wages, interest, and part of the mortgage. Long-term liabilities are those that will not be paid within the coming year(after one year). These include long-term debt (such as we paid for a loan for 5 years), mortgages, lease obligations, and deferred income taxes, or we bought things or could pay for them in a year (or after one year). - The balance sheet have a section for the Capital or Equity and this is how much we actually owned shares for example in the company (if the manager has shares in the company), that would be part of the capital. - The ownership in profitable business is the aim to make money could be owned only by one individuals or it would be a partnership, or could be owned by several people, or it’s a big corporations for example if we have a stoke holders that are holding the shares of the company. - Finally the balance sheet can include the Retained earnings is the final entry in the equity section of the balance sheet. - Retained earnings represents the profit that has not been distributed as dividends (the profit divided between who is those will take the profit if we have more than one person he will profit from the establishment ). For example if we have 4 people they will profit from the establishment, so this profit will be divided between these 4 peoples. If net losses have occurred, this number may be negative. As shown on the sample balance sheet, the fundamental accounting formula (main formula) ASSETS = LIABILITIES + EQUITY or shares is always followed on the bottom line of the balance sheet. https://www.investopedia.com/terms/l/lia bility.asp