The income statement shows a firm's profit after costs, expenses, and taxes over a particular period of time, usually a year, a quarter, or a month. Basically, the income statement reveals whether a business is making or losing money. It summarizes the resources that have come into the organization revenue, and the resources that have left the company, expenses, and the resulting net income or net loss. Revenue is the income generated from normal business operations to sales and other sources. Revenue is always the top line on an income statement. Sales are the major source of income for many organizations. For that reason, revenue is sometimes referred to as sales on an income statement. However, sales and revenue are not exactly the same thing. Many organizations earn revenue from other sources like license or franchise fees, or they may be a non-profit corporation that relies on donations and grants for financial support. Cost of Goods Sold (COGS) is the cost of acquiring or manufacturing the products that a company sells. It includes items tied directly to the production and products like labor and raw materials, indoor acquiring and storing inventory for a retail business. It comes right below revenue on the income statement. Shipping and storage costs would also be included. For example, COGS for a builder would include materials such as drywall and the labor to turn them into the house, where are the shoe store would include the cost of the shoes it purchases for resale. Both businesses would include any associated storage and shipping fees. Purely service company's like accounting firms, do not have any COGS since they do not sell goods. Gross profit or gross margin is the profit a company makes after deducting costs associated with making and selling products or providing services. Gross profit is calculated by subtracting COGS from revenue. Gross profit assesses a company's efficiency at using it's labor and supplies in producing goods or services. It mostly considers variable costs that fluctuate the level of output, such as materials, labor, credit card fees, shipping, and utilities. For a purely service business, gross profit would equal total revenues since there is no cost of goods sold. Operating expenses or costs a business incurs through normal business operations like rent, equipment, inventory costs, office supplies, marketing, payroll, and product development. Operating expenses are necessary and unavoidable for most businesses. Most firms strive to reduce operating expenses to gain a competitive advantage and increase earnings. This must be done carefully, since there's a risk of compromising the integrity and quality of operations. Outsourcing customer service may cut costs, but also result in lower customer satisfaction. Finding the right balance can be difficult, but can also yield significant rewards. Net income indicates how much money the organization makes or loses in a specific period of time. It equals revenues minus cost of goods sold, operating expenses, and other expenses like interest and taxes. Net income is the last line of an income statement and indicates company's profitability. An organization has a net profit when revenues exceed costs and expenses and a net loss when costs and expenses exceed revenues. Here's a simple example of an income statement. This company had a gross profit of a $100,700 and a net profit of about $14,000. Cash flow is the difference between the amount of cash moving into and out of a business in the course of regular business activities. Cash flows into an organization from revenues and flows out through expenses and costs. A business has positive cash flow when it brings in more money than it spends during a specific period. Positive cash flow allows a company to add to it's cash reserves, settle debts, reinvest in it's business, and return money to shareholders through dividends. Negative cash flow happens when a business spends more money than it makes during a specific period. Basically, there's no cash left over after paying expenses. Negative cash flow can be a cause for great concern. Without enough cash to pay it's bills, a company may default on loans or go bankrupt. However, negative cash flow may also indicate that a company is investing in future operations, which is a good thing, for example by marketing heavily. A business may also increase sales and profits and still have cash flow problems. This is often due to a mismatch in the timing of expenditures and income. If a company buys on credit without using cash and sells on credit without getting cash it may show a profit but have no cash because it needs it to pay suppliers before customers pay what they owe. A cash flow statement shows all cash inflows and outflows during a given period of time. The statement that follows the cash made by the business through operations, investment, and financing. A sum of all three segments is called net cash flow. Cash flow from operations come from a company's main business activities. Cash flow from investment, results from investment gains and losses and cash spent on property, plant, and equipment. Cash flow from financing results from use of debt, borrowing or equity, selling shares in the company. Here's a simple cash flow statement. This company increased its cash balances significantly through positive cash flows from operations and selling equity shares.
