Important to note: expenses must be matched with the corresponding revenues in an income statement. Should the company not be able to sell its products, it cannot expense the cost of goods sold on the income statement. It must, instead state such loss as inventory costs on the income statement.

Income statement shows a gross profit, which is obtained by subtracting cost of goods sold from revenues. It does not include general business expenses. There are two most important components of the income statement: Revenue is what the business earns with sales of products or services. Depending on when that revenue is received, it is recorded as profit or account receivable, meaning the business will be receiving it in the future as in a case of extending credit or BNPL agreements.

Cost of Goods Sold: this represents direct expenditures the business incurs to produce or manufacture a product to be sold for profit. This could be anything from purchasing raw materials, labor or manufacturing overhead. In cases of services sold, the cost of goods sold becomes cost of revenue.

Revenue is what the business earns with sales of products or services. Depending on when that revenue is received, it is recorded as profit or account receivable, meaning the business will be receiving it in the future as in a case of extending credit or BNPL agreements.“

Operating Income – what is left over after all of the operating expenses are calculated from the gross profit. This is a profitability measure, also referred to as earnings before interest and taxes (EBIT)

Interest Expense – interest paid on financed portions of assets. Net income is the bottom line, measuring the business profitability. It is what remains after all the bills are paid and income taxes deducted from revenue.

To get a Net Profit Margin =Net Income/Total Revenue

It is important to evaluate sources of revenues to determine if the business revenue numbers can be viewed as dependable or reliable (insert what is balance sheet) Important to note: expenses must be matched with the corresponding revenues in an income statement. Should the company not be able to sell its products, it cannot expense the cost of goods sold on the income statement. It must, instead state such loss as inventory costs on the income statement.

Making Income Statements Adjustments

A decrease/increase in cash flow is calculated by adding up net cash provided by operating activities, net cash used in investing activities + net cash used in financing activities.

Changes in operating assets and liabilities does not affect net income but affect cash flow statement as they reflect changes in operating assets and liabilities.

If an asset increases, a cash expense is generated in the cash flow statement to acquire those assets. However, this does not reflect in net income, so the adjustment must be made to reconcile it to the change in the cash account.

If a liability account decreases, change must also be adjusted from the net income account to reflect that negative change in the cash account.