Day 3 - Income Statement and Balance Sheets

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  • A reading on Income Statement and Balance Sheets (30 minutes)


Explore: Income Statement and Balance Sheets

Income statements and balance sheets are important tools for understanding business profitability. Today, you will learn the basics of these two financial concepts which will help you understand your business better as it grows and develops.


Technology One Corporation
Income Statement
For the year ended December 31, 2017
  1. Sales ………………………………………………………….........   $200,000
  2. Cost of goods sold …………………………………….……..   $150,000 
  3. Gross profit …………………………………………………......   $50,000 
  4. Selling and administrative expense …………………..   $27,000
  5. Depreciation expense ………………………………………..  $5,000
  6. Operating Profit (EBIT)*.............................................  $18,000  
  7. Interest expense ……………………………........……………...  $2,000
  8. Earnings before taxes (EBT) ………………………………..  $16,000
  9. Taxes …………………………………………………………..........  $4,950 
  10.  Earnings after taxes (EAT) ………………………………….. $11,050
*Earnings before interest and taxes


About the income statement:

  • Know that an income statement covers a defined period of time. This could be 3 months, six months, or a year.
  • It is presented progressively, so we can clearly determine the profit or loss after each type of expense item is deducted.
  • We start with sales and then we deduct the cost of goods sold. By doing this, we arrive at the gross profit. The $50,000 gross profit represents the difference between what it costs to make or purchase goods and price you sell them.
  • Operating profit (EBIT) or loss is determined by subtracting out selling and administrative expenses, as well as depreciation expenses.
    • Operating profit (EBIT) is a measure which essentially denotes the efficiency of management in generating revenues and controlling costs.
  • By deducting interest expense (interest payments on money borrowed), we find earnings before taxes (EBT)
  • By subtracting out taxes, we find the earnings after taxes (EAT).
  • An economist may count an increase in the value of a business’ land as in increase in worth, and as a representation of income, but accounting value (as is illustrated on the income statement) is mainly established by actual transactions that establish accounting value. Income that is gained or lost can be verified by these transactions.

Technology One Corporation

Statement of Financial Position (Balance Sheet)

December 31, 2017


Assets Current assets: Cash ……………………………… $4,000 Marketable securities …………….. $1,000 Accounts receivable …………….. $22,000 Less: Allowances for bad debt ….. $2,000 $20,000 Inventory ………………………….. $18,000 Prepaid expenses ………………….. $2,000 Total current assets ……………. $45,000 Other assets: Investments ……………………….. $50,000 Fixed assets ………………………………. Plant and equipment, original cost …. $110,000 Less accumulated depreciation ……… $60,000 Net plant and equipment $50,000 Total assets …………………………………. $100,000

Liabilities and Stockholders Equity
Current liabilities: 
Accounts payable  …………………….                                                       $8,000
Notes payable  …………………………                                                      $10,000
Accrued expenses ……………………..                                           $3,000
Total current liabilities ………….                                      $21,000
Long term liabilities:
Bonds payable, …………………………                                      $9,000
Total liabilities ……………..                                        $30,000
Stockholders’ equity: 
Preferred stock, $100 par value, 50 shares….                                   $5,000
Common stock, $1 par value, 10,000 shares ....                               $10,000
Capital paid in excess of par (common stock) …                            $25,000
Retained earnings ……………………………………..                         $30,000
Total stockholders’ equity ……………………..                           $70,000
Total liabilities and stockholders’ equity ……………..                         $100,000

About the balance sheet
  • Total assets are financed through either liabilities (debts) or stockholders’ equity (investors) Liabilities are the firm’s financial obligations. If the liability is due to be paid back in one year or less, it is considered a current liability. Longer term obligations are those that are due in more than one year.
  • Accounts payable denotes the amount of money owed to your suppliers.
  • Notes payable are usually short-term obligations to the bankers or other creditors.
  • An accrued expense results when a service has been provided, or an obligation has been incurred but payment has not yet taken place.

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