Introduction to entrepreneurship/IENT103/Statements/Income

The Income Statement (also called the profit and loss statement or profit and loss account) focuses on a company's revenue and expenses for a particular period of time (e.g. monthly, quarterly, or annually).

An income statement is based on the following equation (Profit = Income - Expenses).

Required reading

Read the following texts:

• Introduction to the Income Statement
• Income Statement

Quiz

Try the following questions to check what you have understood.

• A company has annual Sales of $328,000 with Cost of Goods Sold $142,000. What is the company's Gross Profit?
  • $470,000
    • Try again. Don't forget, (Annual sales) - (Cost of Goods) = (Gross Profit).
  • $186,000
    • Yes, that's right. (Annual sales) - (Cost of Goods) = (Gross Profit).
• The same company (over the same period of time) spends $76,000 on Salaries and $11,000 on Utilities. What is their income before tax?
  • $99,000
    • That's correct.(Gross Profit) - (Salaries) - (Utilities) = (Income before tax).
  • $87,000
    • Try again. (Gross Profit) - (Salaries) - (Utilities) = (Income before tax).
  • $65,000
    • Try again. (Gross Profit) - (Salaries) - (Utilities) = (Income before tax).
• If income tax is 20%, what is the same company's net income?
  • $79,200
    • Well done! (Income before tax) - (Income before tax x 20%) = Net Income.
  • $72,900
    • Try again (Income before tax) - (Income before tax x 20%) = Net Income.
• Your company has annual Sales of $447,000 and Cost of Goods Sold is $199,000. What is your Gross Profit?
  • $646,000
    • Try again. Remember, (Annual sales) - (Cost of Goods) = (Gross Profit).
  • $248,000
    • Yes, that's correct. (Annual sales) - (Cost of Goods) = (Gross Profit).
• For the same company (over the same period of time), Salaries are $104,000 and Utilities cost $18,000. What is your Income before tax?
  • $122,000
    • Try again. (Gross Profit) - (Salaries) - (Utilities) = (Income before tax).
  • $126,000
    • That's right. (Gross Profit) - (Salaries) - (Utilities) = (Income before tax).
  • $370,000
    • Try again. (Gross Profit) - (Salaries) - (Utilities) = (Income before tax).
• Now, if income tax is 20%, what is your Net Income
  • $25,200
    • Incorrect. This is how much Income Tax you have to pay i.e. (Income before tax x 20%).
  • $100,800
    • Well done!. (Income before tax) - (Income before tax x 20%) = Net Income.

Income statement activity

• Draw up an income statement based on the following figures to determine net profit:
  
  

  Sales	629,000
  Cost of goods sold	293,000
  Salary expense	127,000
  Utilities expense	24,000
  Income tax	20%

  
  You can use this template to help you:

  Item	Income	Expenditure
  Sales
  Less Cost of Goods Sold
  Gross Profit
  Less Salary expense
  Less Utilities expense
  Income before tax
  Less Income Tax Expense
  Net Profit

  
  
  • Click here to reveal the answer.

    • Item	Income	Expenditure
      Sales	629,000
      Less Cost of Goods Sold		293,000
      Gross Profit	336,000
      Less Salary expense		127,000
      Less Utilities expense		24,000
      Income before tax	185,000
      Less Income Tax Expense		37,000
      Net Profit	148,000