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1. What Are Income Statement and Balance Sheet?
An income statement and balance sheet are fundamental financial reports that provide a snapshot of a company’s financial performance and position. The income statement, often referred to as the profit and loss (P&L) statement, details a company’s revenue, expenses, and profits over a specific period. The balance sheet, on the other hand, presents a company’s assets, liabilities, and equity at a specific point in time.
Understanding these statements is vital for anyone involved in business, from entrepreneurs and managers to investors and partners. According to research from the University of Texas at Austin’s McCombs School of Business, businesses that regularly analyze their income statements and balance sheets are more likely to make informed decisions and achieve sustainable growth.
1.1 Key Components of an Income Statement
The income statement typically includes the following key components:
- Revenue: This is the total amount of money a business brings in from its sales of goods or services during a reporting period.
- Cost of Goods Sold (COGS): This includes the direct costs associated with producing and selling goods or services, such as raw materials, labor, and manufacturing overhead.
- Gross Profit: This is calculated by subtracting the cost of goods sold from revenue, representing the profit a company makes before deducting operating expenses.
- Operating Expenses: These are the costs incurred in running the business, such as rent, utilities, salaries, marketing expenses, and administrative costs.
- Operating Income: This is calculated by subtracting operating expenses from gross profit, indicating the profit a company makes from its core operations.
- Interest Expense: This includes the costs a company incurs for borrowing money, such as interest on loans and bonds.
- Income Before Taxes: This is calculated by subtracting interest expense from operating income, representing the profit a company makes before paying taxes.
- Income Tax Expense: This is the amount of income tax a company owes to federal, state, and local governments.
- Net Income: This is the final profit a company makes after deducting all expenses, including interest and taxes. It is often referred to as the “bottom line.”
- Earnings Per Share (EPS): Net income divided by the total number of outstanding shares.
- Depreciation: Value lost by assets, such as inventory, equipment, and property, over time.
- EBITDA: Earnings before interest, depreciation, taxes, and amortization.
