The document discusses the income statement, which reports a business's performance over a period of time. It explains that a simple income statement has the format of Revenues - Expenses = Net Income. However, most businesses use a multi-step income statement that provides more information. This type of statement separates out items such as cost of goods sold, operating expenses, non-operating items, and income taxes to calculate net income. It also defines fixed, variable, and semi-variable costs.

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Accounting Review

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The Income Statement

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Income Statement
 The primary statement of business analysis is the income
statement.
 The Income Statement reports a business’ performance for
the period.

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Income Statement
 A simple format for an income statement is:

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Income Statement
 A simple format for an income statement is:
Revenues – Expenses = Net Income

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Income Statement
 A simple format for an income statement is:
Revenues – Expenses = Net Income
 We will look at a more complex format
later.

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Income Statement
 Revenues are earned for the sale of goods or services. Note
that revenues occur when the sale is made. The payment may
or may not have been received.

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Income Statement
 Revenues are earned for the sale of goods or services. Note
that revenues occur when the sale is made. The payment may
or may not have been received.
Examples of revenues include sales,
service revenue and interest revenue.

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Income Statement
 Expenses are incurred when a business receives goods and
services. Like revenues, payment may or may not have been
made.

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Income Statement
 Expenses are incurred when a business receives goods and
services. Like revenues, payment may or may not have been
made.
Examples of expenses include salaries expense,
utility expense and interest expense.

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Income Statement
 Most businesses require more information from their
businesses than a simple income statement can provide.
Therefore, they use a multi-step income statement format.

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Income Statement
 Most businesses require more information from their
businesses than a simple income statement can provide.
Therefore, they use a multi-step income statement format.
 A format for a multi-step income statement is:

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Income Statement
Sales revenue
- Cost of goods sold
Gross profit
- Operating expenses
Income from operations
+/- Non-operating items
Income before taxes
- Income taxes
Net income

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Income Statement
 Cost of goods sold represents the expense a business
incurred to buy or make a product for resale.

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Income Statement
 Cost of goods sold represents the expense a business
incurred to buy or make a product for resale.
Example - a book store buys a book for
$25 and then sells it for $32. The cost of
goods sold is $25.

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Income Statement
 Operating expenses are the usual expenses incurred in
operating a business.

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Income Statement
 Operating expenses are the usual expenses incurred in
operating a business.
Accounts such as salaries expense,
utility expense, and depreciation
expenses are all shown in this section.

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Income Statement
 Non-operating items are revenue, expenses, gains and
losses that do not relate to the company’s primary operations.

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Income Statement
 Non-operating items are revenue, expenses, gains and
losses that do not relate to the company’s primary operations.
Accounts include interest expense and
gains and losses of the sale of
equipment and investments.

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Income Statement
 Income taxes are computed by multiplying Income before
taxes by the income tax rate.

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Income Statement
 Income taxes are computed by multiplying Income before
taxes by the income tax rate.
Example – Income before taxes is
$50,000. The income tax rate is 30%.
Income taxes = $50,000 * 30% =
$15,000.

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Types of Costs
 Fixed Costs
 Variable Costs
 Semivariable Costs

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Fixed Costs
When an item of
expenditure remains the
same regardless of the
increases or decreases in
the level of activity, we refer
to this as a fixed cost. For
example, placing an
advertisement in the Hilltop
as part of a marketing
campaign for the QBA
course would represent a
fixed cost.

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Variable Costs
Variable costs increase or
decrease in proportion to
increases or decreases in
the level of productive
activity.
The graph shows that the
variable costs of providing
study materials for this
course change in a linear
(straight line) fashion.

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Variable Costs
Semi-variable costs
behave like fixed costs
within a particular range
or level of activity. Once
that range is exceeded,
then the amount spent will
rise in a step-by-step
fashion.

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Variable vs Fixed Costs
Test It

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Food Service
Harry’s hamburger shack sells
cheezburgers, pepsi’s and chips.
It has a nice sit down restaurant
and a teenage, lazy waitstaff.
 Hamburger Patties
 Manager Salary
 Phone Bill
 Cleaning Service
 Electric Bill
 Cook Salary
 Chip Bag MultiPack
 12-Pack of Pepsi

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Manufacturing
D’antes Canes makes stylized
canes for a high-end clientele.
D’ante sells his canes in a
number of kiosks in malls across
the country.
 Wood
 Salesperson Salary
 Salesperson Commission
 Kiosk Location Rent
 Advertisements
 Case of Wood Polish
 Sales Bags
 Trash Bags
 Displays
 Business Cards

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Service
Rhiannon Real Estate sells
studio condos to low-middle class
DC residents. It has offices in
Anacostia, Trinidad, and Takoma
Park.
 Agent Commissions
 Business Cards
 House Listing Fee
 Lawyer Fee (writing sales
contract)
 Open House Decorations
 Receptionist Salary
 Agent Training